Chartered Accountant Finance: [aaykarbhavan] Judgments, Information

IT: In assessment, depreciation to be provided as per Income-tax Act; and not as provided under Companies Act

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[2014] 42 taxmann.com 106 (Bombay)

HIGH COURT OF BOMBAY

Commissioner of Income-tax

Pushparthy Packs (P.) Ltd.*

B.R. GAVAI AND F.M. REIS, JJ.

TAX APPEAL NO. 15 OF 2007

NOVEMBER 28, 2013

Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Income tax Act v. Companies Act] - Whether while assessing income, assessing authority is required to take into consideration depreciation as provided under Income-tax Act and not as provided under Companies Act - Held, yes [Para 5] [In favour of assessee]

HELD

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The law is no more res integra. Various Judgments including the ones in the case of Star Chemicals (P.) Ltd. v. CIT [1993] 203 ITR 11/[1994] 72 Taxman 279 (Bom.) and CIT v.Jamnadas Khimji Kothari [1973] 92 ITR 105 (Bom.) have held that the depreciation arising from the wear and tear of the business assets is a first charge on profits, without deducting which it is not possible to arrive at a profit in a year. It was held that the normal depreciation as provided under the Income-tax Act and not as per the one provided in the books of account, has to be taken into consideration while computing the income-tax of an assessee. In that view of the matter, it is a settled law that while assessing income, the Assessing Authority is required to take into consideration the depreciation as provided under the Income-tax Act and not as provided under the Companies Act. [Para 5]

CASE REVIEW

P.K. Badiani v. CIT [1976] 105 ITR 642 (SC) (para 6) distinguished.

Star Chemicals (P.) Ltd. v. CIT [1993] 203 ITR 11/[1994] 72 Taxman 279 (Bom.) and CIT v.Jamnadas Khimji Kothari [1973] 92 ITR 105 (Bom.) (para 5) followed.

CASES REFERRED TO

P.K. Badiani v. CIT [1976] 105 ITR 642 (SC) (para 2), Star Chemicals (P.) Ltd. v. CIT [1993] 203 ITR 11/[1994] 72 Taxman 279 (Bom.) (para 5) and CIT v. Jamnadas Khimji Kothari [1973] 92 ITR 105 (Bom.) (para 5).

Ms. Asha Desai for the Appellant.

JUDGMENT

B. R. Gavai, J. - The Appeal is admitted on the following two substantial questions of law :

"(A)		Whether on the facts and in the circumstances of the case, the ITAT as also the CIT(A) have erred in holding that accumulated profits is required to be determined after considering depreciation under the Income Tax Act and not under the Companies Act, 1956 ?
(B)		Whether on the facts and in the circumstances of the case, the ITAT erred in not applying the ratio of the Judgment in the case of CIT v. P.K. Badiani [1976] 105 ITR 642 (SC), holding that accumulated profits means profits in the commercial sense and not assessible or taxable profit liable to be taxed as income under Income Tax Act ?"

2. Smt. Desai, learned Counsel appearing for the Appellant, submits that the learned CIT Appeals as well as the learned Tribunal have failed to take into consideration that while computing the taxable income, the authorities have taken into consideration the depreciation as provided under the Companies Act and not as per the Income Tax Act. Learned Counsel further submits that the profits and losses of an Assessee are determined by the accounts maintained by the Assessee which is a Company in the present case. She further submits that while arriving at a taxable income, the authorities ought to have taken into consideration the percentage of depreciation as provided under the Companies Act. Learned Counsel further submits that the Apex Court in the Judgment in the caseP.K. Badiani v. CIT [1976] 105 ITR 642, has laid down a distinction between "profits in the commercial sense" and "profits as under the provisions of the Income Tax Act". The learned Counsel therefore submits that the impugned Orders deserve to be set aside and the Order passed by the Assessing Officer needs to be reviewed.

3. The CIT(A) while considering the submissions on behalf of the Revenue, has found that while considering a taxable income of an Assessee, the Assessee is entitled to the depreciation as provided under the Income Tax Act. It has been found that while considering a case of an Assessee for assessment, it will be governed by the provisions as contained under the Income Tax Act. In so far as the Judgment in the case of P. K. Badiani (supra), is concerned, the question before the Apex Court was as to what would amount to accumulated profits. In the said case, the question that arose for consideration was as to whether the development rebate reserve created by the Company by charging the amount to the profit and loss account would be entitled to a deduction under the provisions of Section 2(6A) of the Income Tax Act. The Apex Court held that unless the accumulated profit is capitalised in some form or the other, mere transfer of the profits to any reserve account will not take away the character of such an amount from the ambit of accumulated profits. It has been held that profits carried to reserve do not cease to be profits unless and until they are effectually capitalised. In the facts of the said case, the Apex Court found that though the part of the profit was transferred to the development rebate reserve account, the same was not capitalised by the Company and, as such, could not be taken away from the ambit of the definition "accumulated profits".

4. The question that arises for consideration before this Court is somewhat different. The question that arises for consideration is as to whether the Assessee is entitled to claim depreciation while computing its taxable income as provided under the Income Tax Act or as provided under the Companies Act.

5. The law is no more res-integra. Various Judgments including the ones in the case of Star Chemicals (P.) Ltd. v. CIT [1993] 203 ITR 11/[1994] 72 Taxman 279 (Bom) and CIT v. Jamnadas Khimji Kothari [1973] 92 ITR 105 (Bom), have held that the depreciation arising from the wear and tear of the business assets is a first charge on profits, without deducting which it is not possible to arrive at a profit in a year. It was held that the normal depreciation as provided under the Income Tax Act and not as per the one provided in the books of account, has to be taken into consideration while computing the Income Tax of an Assessee. In that view of the matter, it is a settled law that while assessing income, the Assessing Authority is required to take into consideration the depreciation as provided under the Income Tax Act and not as provided under the Companies Act.

6. In that view of the matter, we hold that the ratio of the Judgment in the case of P.K. Badiani(supra), will not be applicable to the facts of the present case. The Appeal is, therefore, dismissed with no further orders as to costs.

*In favour of assessee.

Customs Baggage Declaration Regulations 2013 – implementation thereof-reg

Circular No. 05/2014-Customs

Dated 27^th February, 2014

Subject: Customs Baggage Declaration Regulations 2013 – implementation thereof-reg

Attention is invited to Customs Baggage Declaration Regulation, 2013 notified vide Notification No 90/2013-Cus (N.T.) dated 29.08.2013 subsequently amended vide Notification No. 133/2013-Cus. (N.T.) dated 30.12.2013 and Notification No. 10/2014-Cus (N.T.) dated 10.02.2014. The Customs Baggage Declaration Regulations, 2013 will come into force with effect from 1.03.2014.

2. Under the Customs Baggage Declaration Regulations 2013 all incoming international passengers will be required to declare the content of their baggage in the Indian Customs Declarations Form prescribed in the regulation. Therefore the declaration relating to Customs purposes by incoming passengers in arrival card notified by MHA hitherto done by passengers will be dispensed with. In other words, the incoming passengers will have to fill up the form notified under Customs Baggage Declaration Regulations 2013 independent of the form prescribed by the MHA. Ministry of Home Affairs has decided that arrival (disembarkation) card of MHA would be given to foreign nationals only.

3. Directorate of Publicity and Public Relations, New Delhi has been requested to print the Indian Customs Declarations Forms and distribute the same to all Commissioners of Customs having jurisdiction over the airports. The Indian Customs Declarations Forms may also be handed over to concerned airlines for distributing the same among the passengers.

4. Board desires that the Commissioners of Customs should sensitize field formations working at airports so that this arrangement should not disrupt passenger facilitation at the airports.

5. Wide publicity may be given at the airports and suitable public notice be issued for guidance of staff.

6. Difficulty, if any, may be brought to the notice of the Board immediately.

F. No. 520/13/2013- Cus.VI

Yours faithfully,

(R.P.Singh)

Director (Customs)

IT : HC upholds Revenue's claim for privilege/confidentiality over 2G Spectrum report of DIT(Inv)

• The law only requires that the information or material on which the AO records his or her satisfaction that income has escaped assessment is communicated to the asseseee, without mandating the disclosure of any specific document.

• Where the reasons recorded have been communicated and do provide - independent of the 2G Report referred to in the reasons - details of the new and tangible information that support the AO's opinion, non-supply of 2G Spectrum report prepared by DIT(Inv) to the assessee on the grounds of confidentiality shall not vitiate the proceedings initiated under section 147 and shall not render the proceedings void.

• There is no legal proposition that mandates the disclosure of any additional document.

• This is not the say that the AO may in all cases refuse to disclose documents relied upon by him on account of confidentiality, but rather, that fact must be judged on the basis of whether other tangible and specific information is available so as to justify the conclusion irrespective of the contents of the document sought to be kept confidential.

• Only when the privilege is claimed as regards the reasons recorded (i.e. the satisfaction note), or when no material is provided in addition to the mere assertion of the subjective satisfaction of the AO, may the principle denying privilege or confidentiality operate.

• Even then, the claim for privilege may still prevail in that the Court may consider the manner in which the documents are to be inspected, but such questions does not arise in cases such as the present, where concrete and specific details - which support the belief under section 147/148 - are communicated to the assessee independent of the document sought to be disclosed.

• Thus, the non-disclosure of the 2G Spectrum Report does not affect the impugned notice in this case.

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[2014] 43 taxmann.com 62 (Delhi)

HIGH COURT OF DELHI

Acorus Unitech Wireless (P.) Ltd.

Assistant Commissioner of Income-tax

S. RAVINDRA BHAT AND R.V. EASWAR, JJ.

W.P. (C) NO. 1954 OF 2013
C.M. APPL. NO. 3721 OF 2013

FEBRUARY 28, 2014

C.S. Aggarwal, Prakash Kumar and Sheel Vardhan for the Appellant. Rohit Madan and Akash Vajpai for the Respondent.

ORDER

S. Ravindra Bhat, J. - This writ petition impugns reassessment notices issued and proceedings conducted under Section 148 of the Income Tax Act, 1961 ("the Act") in respect of the Assessment Year ("AY") 2009-2010.

2. The writ petitioner, (hereafter "Acorus"), is a company incorporated under the Companies Act, 1956. It filed its return of income on 6.10.2010, declaring nil income for AY 2009-2010. This return was processed under Section 143(1) of the Act, without any notice under Section 143(2). Subsequently, Acorus was served with a notice dated 5.7.2011 under Section 148 of the Act for reassessment of the AY 2009-2010. Acorus requested a copy of the reasons that led to opening of the reassessment proceedings. No such reasons were provided; however a questionnaire dated 16.9.2011 was sent, to which the petitioner duly responded. Thereafter, reasons to believe that income had escaped assessment were provided to the petitioner by a letter dated 30.3.2012. In response, Acorus contended that since

"2…reasons have been supplied after a gap of more than nine months and that is highly belated and as such, in terms of judgment of the Hon'ble Delhi High Court in the case of Haryana Acrylic Manufacturing Co. Ltd. v. CIT depicted in 308 ITR 38, notice u/s 148 of the Act is without jurisdiction.

3. Acorus requested a copy of the report prepared by the DIT (Inv.) in respect of the 2G spectrum cases. The DIT responded by a letter dated 2.4.2012, indicating that materials relied upon the Revenue, including the report on the 2G spectrum cases, is confidential and cannot be disclosed. By a letter dated 2.4.2012, the Revenue asked the petitioner to file its objections to the reasons recorded, and supplied to the petitioner. Acorus filed objections by a letter dated 9.4.2012, which were disposed off by the Revenue by an order dated 10.4.2012. The proceedings were, at this stage, challenged before this Court in W.P.(C) No. 2155/2012. Acorus then contended in those proceedings that the notice under Section 147 was bad in law, as the Assessing Officer ("AO") could have initiated proceedings under Section 143(2) of the Act. The Court rejected this submission, in its judgment, dated 28th May, 2012, holding that:

"it is not possible to accept the broad universal affirmative submission of the petitioner that notice under Section 147/148 of the Act cannot be issued when the Assessing Officer could have (sic) issue a notice under Section 143(2) of the Act. This will depend upon the facts."

4. After examining the facts of the case, the Court disposed off the writ petition in the following terms:

"23. The writ petition is accordingly disposed of recording that the respondents have agreed to and will be bound by the statement to withdraw notice under Section 147/148 dated 5th July, 2011, but will have liberty and right to issue fresh notice under Section 147/148, after recording reasons to believe. The said notice will not be barred because the respondents had not initiated proceedings by issue of notice under Section 143(2) of the Act or they had earlier issued notice under Sections 147/48 dated 5th July. 2011. With the aforesaid findings and observations writ petition is disposed off. In the facts of the case, there will be no orders as to costs."

5. Accordingly, by a letter dated 19.7.2012, the Revenue informed the petitioner that in pursuance of the order of this Court, previous proceedings under Section 147/148 had been dropped, and a fresh notice was issued. In a letter dated 30.8.2012, the reasons to believe that income had escaped assessment were also communicated to the petitioner, which read as follows:

"M/s Acorus Unitech Wireless Pvt Ltd was incorporated on 24/10/2008. The FY 2008-09 relevant to AY 09-10 was the 1st year of operation of the company. Based on information received from the office of DIT (Inv.)-1, New Delhi, vide letter dated 23/6/2011, the then jurisdiction ITO, Ward 1(1), New Delhi issued notice u/s 148 for AY 2009-2010, on 5th July, 2011.

Subsequently, the case was transferred to the undersigned for completing assessment proceedings as the assessee was a new assessee and filed return for the first time. During the course of the proceedings the assessee filed its objections to the initiation of proceedings u/s 148 which were duly disposed off by way of speaking order dated 10/4/2012.

On 13/4/2012, the assessee company filed Civil Writ Petition challenging the action of the AO for issuance of the notice u/s 148 as well as the merit of the case with regard to the reasons recorded. The Hon'ble High Court, vide their order in ITA No. 2155/2012 dated 28/5/2012, while disposing off the writ petition, has held that the revenue has agreed to and will be bound by the statement to withdraw the notice u/s 148 dated 5th July, 2011, but will have liberty and right to issue fresh notice u/s 147/148, after recording reasons to believe. The court has further held that the said notice will not be barred because the revenue had not initiated proceedings by issue of a notice u/s 143(2) of the act or they had earlier issued notice u/s 147/148 dated 5th July, 2011. Thus, in view of the observations and directions of the Hon'ble Delhi High Court, the fresh reason to believe that the assessee has income which has escaped assessment, are hereby recorded as follows.

As per the information received from the DIT (Inv.)-1, New Delhi, vide letter dated 23rd June, 2011, it is seen that eight subsidiaries of Unitech Ltd., had applied for Unified Access Service Licenses (UASL) (SG Spectrum) in September 2007 and were allotted 21 circles by the DOT in January 2008. Post allotment of UASL, M/s. Unitech Ltd. transferred 75% of its stake in these eight telecom subsidiaries (Now merged and known as United Wireless (Tamil Nadu) Pvt. Ltd.) at par i.e. Rs. 10 per share to three of its group companies on the basis of agreement dated 25th October, 2008. One out of these three group companies i.e. M/s Acorus Unitech Wireless Pvt. Ltd. is being assessed in this circle.

Simultaneously, the above referred eight telecom companies and subsidiaries of M/s Unitech Ltd. entered into an agreement with Telenor Asia Pvt. Ltd., Singapore, for issue of fresh shares at a huge premium of Rs. 159 per share with Face Value of Rs. 10/-. This agreement was finalized on 28th October, 2008.

After considering the above facts, it is clear that M/s Unitech Ltd sold shares of its telecom licensing companies to its three group companies which includes M/s Acorus Unitech Wireless Pvt. Ltd. at a rate lower than the market rate. The market rate was Rs. 169 per share, including the premium of Rs. 159 per share, because this is the rate at which M/s Telenor Asia Pvt. Ltd., Singapore purchased shares of the licensing companies from M/s Unitech Ltd. This is particularly apparent because both the transactions i.e. the transaction of sale of shares by M/s Unitech Ltd. to its three group companies including M/ AcorusUnitech Wireless Pvt. Ltd. and sale of shares to M/s Telenor Asia Pvt. Ltd., Singapore took place within days of each other. The total number of shares transferred to M/s Acorus Unitech Wireless Pvt. Ltd. by the eight licensees companies were 45659850. Hence, as discussed above, the differential amount of Rs. 159/- per share which comes to Rs. 7259916150/- is the income of the assessee in the form of benefits arising from business carried on by the assessee and it to be taxed under the provisions of Section 28(iv) of the Income Tax Act.

M/s Acorus Unitech Wireless Pvt. Ltd. filed its return of income for AY 2009-2010 on 6th October, 2010. Further in response to the earlier notice u/s 148 dated 5th July, 2011, the assessee fled its return of income vide letter dated 1st August 2011. It is noticed that the assessee has not declared the above income in the shade of benefits arising from business carried on by the assessee amounting to Rs. 7259916150/- taxable under the provisions of Section 28(iv) of the IT Act in the return filed suo-moto and has neither declared this income in the return filed in response to notice u/s 148 for AY 2009-2010. After considering the above facts and the issues involved therein, I have reasons to believe that income Rs. 7259916150/- has escaped assessment for AY 2009-2010 and hence it is a fit case to issue notice u/s 148 of the Income Tax Act, 1961. The notice u/s 148 is issued separately."

6. Acorus filed detailed objections to this notice, which were dismissed by the Revenue by orders dated 15.2.2013 and 12.3.2013. Accordingly, the petitioner has approached this Court under Article 226 impugning this notice under Section 147/148 of the Act.

7. Learned counsel for the petitioner argues that the reasons for initiation of the present reassessment proceedings were recorded on 17.7.2012, which was during the pendency of the proceedings initiated by the previous notice issued under Section 148. It is argued that the plea of the Revenue that the proceedings were dropped on 18.6.2012 was an afterthought which is not supported by any material on record, and is, in fact, contrary to the communication dated 19.7.2012, wherein the Revenue had admitted that the proceedings were dropped only subsequently, on 19.7.2012. This, it is submitted, justifies the setting-aside of the fresh notice under Section 147/148. Reliance is placed on the decision of the Supreme Court inTrustees of HEH The Nizam's Supplemental Family Trust v. CIT, [2000] 242 ITR 381 (SC), for the holding that:

"10…unless the return of income already filed is disposed of, notice for reassessment under Section 148 cannot be issued, i.e., no reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of the return already filed are not terminated."

Similarly, reliance is placed on the decision in CESC Ltd. and Anr. v. DCIT, 263 ITR 402 (Cal) to argue that unless the assessment is complete, no suspicion under Section 147/148 can be the basis of a valid notice.

8. Further, learned counsel argues that the earlier proceedings were stated to be based upon a letter of the DIT (Investigation) dated 23.6.2011, as are the present proceedings. However, despite the identical facts before the Revenue, the first proceedings alleged that the income had not shown up under the head Short Term Capital Gain arising on transfer of equity shares, while the present proceedings indicate that income has escaped assessment under Section 28(iv) of the Act. These contrary opinions formed on the basis of the same facts, learned counsel urges, is arbitrary and such a change in opinion is in itself a ground to quash the proceedings initiated under Section 147/148. Reliance here is placed upon the decision of the Supreme Court in Commissioner of Income Tax v. Excel Industries Ltd., 358 ITR 295, for the proposition that although the principle of res judicata does not apply in such cases, "the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it."Learned counsel argues that far from being based on tangible and concrete facts, the impugned notice merely makes a roving and fishing enquiry without any tangible material on record, which is impermissible under the strict standards of Section 147/148 of the Act. Further, it is argued that the concept adopted by the Revenue is baseless, as even if the shares were transferred at a rate less than the rate at which shares were subscribed in the eight telecom companies by the Singapore entity, that fact by itself cannot be made the basis of the allegation that the petitioner has received a benefit in the course of business, which is the requirement under Section 28(iv). Rather, it is argued - as is clear from the record, and the audited balance sheet of the petitioner submitted along with the return under Section 143(1) - that an aggregate consideration Rs. 4.63 crores was made for the purchase of 45550000 equity shares of the eight telecom companies from M/s Unitech Limited. The entire purchase consideration, it is urged, was paid out of borrowings raised from Prakausali Investment India (P) Ltd. and by issuing unsecured debentures to M/s Unitech Holding Ltd., which means that the income so-called is not chargeable to tax under Section 28(iv), being outside the course of business. Learned counsel submits that as a condition precedent for invoking Section 28(iv), a benefit must arise from business or exercise of a profession. Thus, before the aforesaid provision could be invoked, there has to be a nexus between the business of the assessee and the purported benefit arising in the course of business, in terms of the judgment in CIT v. Jindal Equipments Leasing and Consultancy Services Ltd, 2010 (325) ITR 87 (Del), which is clearly absent in this case.

9. It is submitted that Acorus merely invested in shares of the telecom companies and had so reflected this fact in its annual balance sheet. The acquisition and sale of shares in this case, it is argued, it clearly for the purpose of investment and not business, and thus the allusion to Section 28 in the reasons to believe that income has escaped assessment is clearly and patently incorrect is terms of the judgment of the Gujarat High Court in Elscope (P.) Ltd. v. CIT, 313 ITR 293 (Guj). It is urged that no benefit or gain accrued to the petitioner, and the mere fact that there was a difference in the share price does not logically lead to the conclusion that a profit was made by the petitioner without disclosing the same. It is further argued that as the funds for the investment were provided by the company who had sold the shares in the first place, the entire economic benefit remained with the said company, and thus, there is no tangible and relevant material to conclude that there is a reason to believe that Section 28(iv) of the Act is applicable to this case. It is argued that merely because the petitioner had purchased shares, the market value of which was allegedly higher, does not lead to the conclusion that income escaped assessment. For this, reliance is placed on various decisions of the Supreme Court, most notably, ITO v. Lakhmani Mewal Das, 103 ITR 437 (SC), for the observations that the AO must initiate reassessment only on the basis of definite information, and not distant, remote or far-fetched facts that do not warrant such an inference. Further, learned counsel argues that there is no fresh material, apart from what was disclosed in the original return of income itself that could justify the reopening of assessment. This, it is argued, is because the fact of sale and purchase of these shares was disclosed in the accounts of the petitioner along with the original return, and no new material has surfaced to trigger the powers under Section 147/148.

10. Learned counsel further argues that the reasons provided by the Revenue are patently false as there is no comparison between the shares purchased by the petitioner, and the Singapore entity, as the shares purchased by the petitioner were encumbered property (having been pledged by M/s Unitech Ltd. with various banks to obtain loans), whereas the fresh shares allotted to the Singapore entity were free property. Thus, it is argued that in terms of the nature of the shares, the management control, the transfer restrictions, business risks etc., the two transactions are not comparable and thus, the reasons provided by the Revenue cannot sustain reassessment proceedings.

11. In any case, learned counsel argues that the report of the DCIT (Investigation) which forms the basis of the Section 147/148 notice in this case has not been provided to the petitioner, despite a specific request to that effect, thus denying the petitioner the opportunity to present complete objections. Such failure to provide the evidence along with the reasons to believe is, in the argument of the learned counsel, fatal to the proceedings as the petitioner has the right to be supplied the information on the basis of which such proceedings are sought to be imitated. Reliance is placed on the decision of the Allahabad High Court in Dr. Roop v. CIT, [2012] 209 TAXMAN 421 (All), the Bombay High Court in Spacewood Furnishers v.DGIT, [2012] 340 ITR 393 (Bom), and the Calcutta High Court in Smt. Uma Devi Jhawar v. ITO, 1996 (218) ITR 573 (Cal), for the proposition that confidentiality is not a valid ground for failure to disclose documents relied upon by the Revenue in order to initiate reassessment proceedings against the assessee. It is argued that while the documents may be confidential, they cannot remain as such during Section 147/148 proceedings as the assessee must be given an opportunity to answer the allegations put to it.

12. Counsel for the revenue highlighted that the petitioner cannot question the legality of the notice proposing reassessment in this case, because in the previous judgment of this Court, the option of issuing such notice was expressly kept open. It was argued that having regard to the nature and magnitude of the transaction and the material which the revenue secured subsequently, this was the clearest case where reassessment was warranted in respect of income escaping assessment; there could be no reason to question the notice as not disclosing any fresh material or tangible reasons warranting exercise. Once this option to reopen the assessment is conceded, the Court should not exercise its discretion in examining the merits of the transaction to consider whether it is taxable.

13. Three issues arise in the present case. First, whether the timing of the notice in this vitiates the proceedings under Section 147/148; secondly, whether the Revenue is within its right to keep the 2G Spectrum Report from the assessee on the ground of confidentiality, or whether the failure to supply the report vitiates the proceedings, and finally, whether the reasons to believe that income has escaped assessment in this case meet the test under Section 148 and judicial directives in that regard.

14. On the first issue, the Court notices the observations in W.P.(C) 2155/2012, whereby the first round of reassessment proceedings were withdrawn. The Court disposed off the writ petition with the clear finding that the fresh notice "will not be barred because the respondents … had earlier issued notice under Sections 147/48 dated 5 July. 2011." The plea taken by the petitioner presently is that the proceedings initiated by the order dated 5.7.2011 came to be withdrawn only on 19.7.2012, after recording reasons for the fresh notice under Section 147/148 (dated 19.7.2012) on 17.7.2012. However, consequent to the decision of this Court in W.P.(C) 2155/2012, the DCIT dropped the previous proceedings initiated under Section 147/148 by an order sheet entry dated 18.6.2012, proceeding subsequently to record fresh reasons for reassessment. This, however, is countered by the petitioner as an order sheet entry does not by itself end the proceedings, without the necessary intimation to the assessee that such withdrawal has taken place. In this case, the issuance of a fresh notice under Section 147/148 (and the reasons recorded for that purpose) has to be judged in the context of the previous decision of this Court. The fresh notice served upon the assessee was consequent to and within the framework of the earlier order of this Court. While the first round of reassessment proceedings was not withdrawn qua the petitioner by way of an intimation; the fresh reassessment proceedings equally cannot be said to have begun until the notice under Section 147/148 was issued, i.e. on 19.7.2012. The fact that the reasons recorded bore the date 17.7.2012 does not vitiate these proceedings in any way, as the order sheet entries - which are at the very least relevant for this purpose - clear demonstrate that the order of this Court in the earlier writ petition was complied with methodically. The fact that the reasons recorded were prepared (which necessarily precedes the issuance of the notice) before 19.7.2012 is only logical. There is no nexus between the withdrawal of the first reassessment notice issued and the recording of reasons in order to prepare for a subsequent notice, as long as two notices/proceedings are not pending against the same assessee in respect of the same AY at the same time. That, quite clearly, is not the case in the present circumstances.

15. Acorus's plea that the proceedings would have been justified had intimation of the withdrawal of the earlier notice been given prior to 17.7.2012, as opposed to 19.9.2012, is unpersuasive as it attempts to draw a distinction where none exists. There is complete transparency in the manner in which the reasons were recorded, and the fresh proceedings instituted. Acorus failed to demonstrate how the mere fact that a letter conveying the decision taken in the order sheet entry dated 18.6.2012 before the reasons recorded for the fresh notice would save the proceedings in this case, and importantly, how the present course of action prejudices the petitioner or violates any procedural mandate under Section 147/148 or any other provision of the Act. To the contrary, in this case the reasons were supplied and thus intimated to the petitioner along with the notice on 19.9.2012, and thus, the internal date on which the reasons were prepared cannot vitiate the proceedings, as the relevant date is that on which it is communicated to the petitioner (and not prepared within the Revenue). As a Division Bench of this Court held in Haryana Acrylic Manufacturing Companyv. CIT, [2009] 308 ITR 38 (Delhi), "the issuance of the notice and the communication and furnishing of reasons go hand-in-hand." The reasons recorded on 17.7.2012 are necessarily to be read with the fresh notice dated 19.7.2012, when both documents were communicated afresh to the petitioner, and the previous proceedings were dropped.

16. Indeed, the date on which the reasons were prepared may - in some cases - render the action of the Revenue arbitrary given the chronology of events, but that inference does not present itself in this case. The order sheet entries demonstrate a clear and chronological compliance with the earlier order of this Court. In any case, the previous order of this Court expressly bars any objections by the petitioner to the fresh notice on the ground that the Revenue "had earlier issued notice under Sections 147/48 dated 5 July, 2011." In principle, the petitioner's present argument is that the proceedings are vitiated because the reasons in this case were recorded before the earlier notice was dropped. This plea, in other words, seeks to bar the present notice on the ground that an earlier was issued and not revoked at the time the impugned action took place. This argument - attempting to play the legality of the second notice against the existence of the first notice - was one that the previous order of this Court foresaw and specifically barred in terms of the order dated 28.5.2012, which is now final and binding upon both parties. Indeed, holding that the present notice is to be set aside would set to nought the direction of this Court in the earlier writ petition. Accordingly, this ground argued by the petitioner is rejected.

17. The Court will deal with the second and third questions together, as they relate to the common issue of the adequacy of the material disclosed to justify reassessment proceedings.

18. First, Acorus argues here that the Revenue's failure to disclose the 2G Spectrum Report, on the basis of which it initiated proceedings under Section 147/148, renders the proceedings void. The Revenue in the present case claims that the 2G Spectrum Report is confidential, and thus has not disclosed the document. Before addressing this question, it is important to restate an accepted, but often neglected, principle, that in its writ jurisdiction, the scope of proceedings before the Court while considering a notice under Section 147/148 is limited. The Court cannot enter into the merits of the subjective satisfaction of the AO, or judge the sufficiency of the reasons recorded, but rather, determine whether such opinion is based on tangible, concrete and new information that is capable of supporting such a conclusion. This was recognized by the Supreme Court in M/s. Phool Chand Bajrang Lal v. Income Tax Officer and Anr., [1993] 203 ITR 456 (SC):

"27. Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non- specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief."

19. In this case, the AO has supplied reasons to believe that income has escaped assessment. This records the alleged undervaluation of shares in the sale/purchase agreement with Unitech Ltd., as compared to the transaction with Telenor, the nature of the transaction, the charging section under the Act such income would fall under, the precise monetary differential on a comparison of the two transactions etc. The notice thus provides details of the precise transaction sought to be reassessed, the reasons for why income has escaped assessment, and the information supporting such a belief. Far from being vague and irrelevant material, these facts constitute new and tangible information supporting the Section 147/148 notice in this case. Importantly, the petitioner in this case has not denied the correctness of these facts either - that such shares were bought at the nominal price of Rs. 10/-, while the shares were sold to Telenor at a substantial premium. The petitioner, however, seeks to urge that the inferences drawn by the AO - in terms of the tax effect of these transactions - are incorrect. At this juncture, it is important to remember the words of the Supreme Court inCalcutta Discount Company Ltd. v. ITO, Companies District, I and Anr., [1961] 41 ITR 191 (SC), where the Court noted:

"From the primary facts in his possession, whether on disclosure by the assesses, or discovered by him on the basis of the facts disclosed, or otherwise - the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable."

20. Therefore, primary facts in this case - that lead to the AO's satisfaction - have been spelt-out in this case in the reasons recorded by the AO. These facts are, at the very least, capable of supporting the inference that the sale of shares to the petitioner in this case from Unitech Ltd. was undervalued, and that such undervaluation (compared to the Telenor transaction) was not disclosed by the assessee. Indeed, this is where the Court's inquiry terminates. The adequacy of the reasons provided by the AO fall outside the Court's review powers, and within the domain of the AO, at this stage of the proceedings where only a preliminary finding under Section 147/148 has been made.

21. Acorus advanced arguments as to the incorrectness of the AO's views. Here, various aspects of this transaction have been canvassed before the Court, i.e. the lack of comparability between the Unitech- Telenor transaction and the present case, the difference between the nature of the shares itself in the two cases, the inapplicability of Section 28 of the Act given that the purchase of shares was in the nature of an investment and not a business, the lack of accrual of any benefit to the petitioner etc. The Court, however, cannot enter the merits of the satisfaction recorded by the AO. These issues may indeed be raised, but before the AO in the first instance, and subsequently within the appellate regime provided by the Act itself, as opposed to a disguised merits review under Article 226 at such an early stage of the proceedings. At the time of a Section 1476/148 notice, the inquiry is at a preliminary stage, and thus, conclusive legal or factual determinations are neither called for nor provided. As the Supreme Court noted in Sri Krishna Pvt. Ltd. Etc. v. ITO, Calcutta and Ors., [1996] 221 ITR 538 (SC):

"8…It is necessary to reiterate that we are now at the stage of the validity of the notice under Section 148/147. The enquiry at this stage is only to see whether there are reasonable grounds for the Income Tax Officer to believe and not whether the omission/failure and the escapement of income is established. It is necessary to keep this distinction in mind."

22. In this context, the Court will now turn to the question of whether the disclosure of the 2G Spectrum Report is mandatory, and whether the failure to supply it is fatal to the present proceedings. The law only requires that the information or material on which the AO records his or her satisfaction is communicated to the asseseee, without mandating the disclosure of any specific document. While the 2G Spectrum Report has not been supplied in this case on grounds of confidentiality, the reasons recorded have been communicated and do provide - independent of the 2G Report - details of the new and tangible information that support the AO's opinion. These facts are capable of justifying the satisfaction recorded on their own terms, as discussed above. In this context, there is no legal proposition that mandates the disclosure of any additional document. This is not the say that the AO may in all cases refuse to disclose documents relied upon by him on account of confidentiality, but rather, that fact must be judged on the basis of whether other tangible and specific information is available so as to justify the conclusion irrespective of the contents of the document sought to be kept confidential. In cases such as the present, however, where the information and facts communicated by the AO are themselves in accordance with the minimum requirement under Section 147/148, the petitioner cannot compel the disclosure of other documents that the assessee may have also relied upon.

23. The three cases relied upon by the petitioner to argue that the AO cannot claim privilege over documents utilized by him do not support such a broad ratio, but cohere with the above discussion. In Dr. Roop(supra), the assessee impugned the validity of a search and seizure operation under Section 132 of the Act on the ground that no 'reason to believe' arose in that case. There, the Revenue claimed privilege as regards the satisfaction note itself and other material/documents - which in the Revenue's stance - supported the search and seizure. In essence, no reasons, documents or even the warrant of authorization were communicated to the assessee to demonstrate that there was a 'reason to believe', taking the stance rather that the say-so or assertions of the Revenue were sufficient. It was in this context that the Court held that the Revenue cannot claim privilege (in that case, under Section 123 of the Evidence Act) as regards the satisfaction note and the documents supporting the search and seizure operation. In Spacewood Furnishers(supra), the question again was of the validity of a Section 132 search and seizure. The satisfaction note had not been communicated to the assessee. The Court held that in such cases, the assertion of the Revenue is not sufficient, and the Court may call upon the Revenue to produce the satisfaction note file. Relying on Uma Devi Jhawar (supra), the Court held:

"However, as the petitioners have not made any express prayer seeking inspection of satisfaction note file, we do not find it necessary to conclude this aspect. We, however, express that when the satisfaction recorded is justiciable, the documents pertaining to such satisfaction may not be immune and if appropriate prayer is made, the inspection of such documents may be required to be allowed."

24. In this case, the Revenue contended - without disclosing the satisfaction note or the supporting documents - that "after discreet enquiries, the action has been taken and … there is material on record which supports it." After compelling disclosure of the satisfaction note file - as no other information/material was brought on record by the Revenue - the Court noted that it "does not show any date, time or place of any such discreet enquiry or even does not name the person with whom it was made". Accordingly, the proceedings were set aside for failure to disclose any specific and relevant information.

25. Finally, in Uma Devi Jhawar (supra), the question concerned the validity of reassessment proceedings under Section 147/148. The asssessee had purchased a plot of land, on which she had constructed a building. She had disclosed the cost of construction in her return of income. In the reassessment proceedings, the reasons recorded by the AO indicated that the valuation officer of the Income Tax Department valued the cost of construction at a greater amount than disclosed, leading thus to the belief under Section 147/148 that income had escaped assessment. However, as the Income Tax Appellate Tribunal had - in the course of the assessment itself - earlier held that the increased valuation, which was also questioned at the time of the filing of the return, was incorrect, the Court held that the reasons recorded cannot properly rely on a report of the valuation officer that agitates a question previously decided on appeal, and which was now final and binding between the parties. In holding that the "materials having a natural nexus to the formation of belief have to be disclosed by the Income Tax Officer", the Court cast some light on the sort of material that have to be disclosed:

"22. He can do so by filing an affidavit. The mere disclosure of the belief in the affidavit filed by the Income Tax Officer without setting out any material on the basis of which the belief was arrived at is not sufficient. Where no affidavit is filed by the Income Tax Officer, in spite of the opportunity given, the court may direct production of the records containing materials to establish that there is a direct nexus or live link between the materials and the formation of his belief. If the court allows the Income Tax Officer to produce such records and the court examines the materials to find whether there are tenable reasons, the court must allow inspection of such records to the assessee. The recorded reasons or materials or the letter of proposal sent by the Income Tax Officer to the Commissioner are not privileged documents. In our view, the learned judge was not right in denying inspection of the records to the assessee. No litigant should have a feeling that the procedure adopted by the court has denied him a reasonable opportunity of hearing. Unless a document is privileged, if the court looks into such document for the purpose of deciding the merits of the respective contentions, inspection of such document cannot be withheld from the adversary."

26. Far from holding that all documents used by the AO, let alone specific documents indicated by the assessee, are to be disclosed, the ratio of these decisions is far narrower. Only when the privilege is claimed as regards the reasons recorded (i.e. the satisfaction note), or when no material is provided in addition to the mere assertion of the subjective satisfaction of the AO, may the principle denying privilege or confidentiality operate. Even then, the claim for privilege may still prevail in that the Court may consider the manner in which the documents are to be inspected, but such questions does not arise in cases such as the present, where concrete and specific details - which support the belief under Section 147/148 - are communicated to the assessee independent of the document sought to be disclosed. Thus, the non-disclosure of the 2G Spectrum Report does not affect the impugned notice in this case.

27. For the above reasons, this writ petition has to fail; it is dismissed. In the circumstances, the writ petitioner shall bear the costs of the proceedings, quantified at Rs. 50,000

CX- Rule 8(3A) of CER, 2002 - default - although what is required to be paid is to be construed as arrears of revenue the same have to be paid in cash - any other interpretation will make restriction meaningless: CESTAT

By TIOL News Service

MUMBAI, MARCH 05, 2014: THE appellants are the manufacturers of printed and laminated plastic films which attracts Central Excise duty.

During the month of October, 2010, they cleared excisable goods, on which duty of Rs. 1,51,21,904/- was payable by them by 5.11.2010.

The appellants adjusted Rs. 1,43,29,033/- from the Credit Account relating to inputs/input services/Capital Goods. The balance duty amounting to Rs. 7,92,871/- was, therefore, required to be paid by them in cash through Account Current. In the monthly return filed by them, they have shown the said amount of Rs. 7,92,871/- as paid in cash through Account Current even though no such amount was paid by them.

On 25.11.2010, they adjusted the said amount from the accumulated Credit of Inputs etc. and which was apparently in contravention of rule 3(4) of CCR, 2004.

The said amount was finally paid by them in cash vide GAR-7 challan on 4.6.2011 and interest on the said defaulted amount was paid on 5.7.2011.

The department detected the above mentioned irregularity and informed the appellants vide letter dated 31.1.2011/15.2.2011.

Inasmuch as in terms of rule 8(3A) of the CER, 2002 as the appellant had defaulted in payment of duty beyond thirty days from the due date, they were required to pay excise duty for each consignment at the time of removal, without utilizing the CENVAT credit till the date they paid the outstanding amount including interest thereon. As the appellant had not followed the rule laid down, it was to be deemed that such goods have been cleared without payment of duty.

Consequently, a SCN dated 30.11.2011 was issued to the appellant demanding duty of Rs. 8,00,09,346/- which was equivalent to the amount of CENVAT Credit utilized for clearance of goods during the period 6.12.2010 to 4.7.2011.

Another SCN dated 23.7.2012 was also issued demanding duty of Rs. 13,12,25,602/- in respect of the goods cleared during 5.7.2011 to 31.3.2012. The demand was made equivalent to the CENVAT Credit utilized by the appellants during the said period. The said demand was made on the grounds that the appellants have defaulted in payment of Rs. 8,00,09,346/- (covered by the first show-cause notice) through cash and, therefore, the provisions of Rule 8(3A) of CER, 2002 continues to operate for the subsequent period viz. 5.7.2011 onwards.

The demands were confirmed along with penalties by the CCE, Thane-II and, therefore, the appellant is before the CESTAT.

These were the submissions made by the appellant -

(i) They have paid an amount of Rs. 7,92,871/- on 25.11.2010 and, therefore, there was no default in making the payment;

(ii) Even if it is presumed that there was a default, the same has been paid on 5.7.2011.
(iii) During the period from 6.12.2010 to 4.7.2011, as per Rule 8(3A), they were required to pay the duty consignment-wise without utilizing the CENVAT credit. Since they were required to pay the duty consignment-wise there is no question of default of duty for the months of December, 2010 to June, 2011;

(iv) Since they have not paid the duty at the time of clearance of each consignment through PLA but utilized the CENVAT credit, all their clearances during the period are deemed to have been without payment of duty in terms of rule 8(3A).

(v) On 5.7.2011 when they paid the defaulted amount along with the interest, the credit earned during the earlier period is available to them for utilization. As per Board's Circular No. 962/05/2012-CX.8 dated 28.3.2012, arrears of duty can be paid from the CENVAT Credit Account. Thus the payment made during the period 6.12.2010 to 5.6.2011 in respect of the clearances made during the said period gets regularized. Revenue can, at the most, ask for the interest from the date of clearance to 5.6.2011.

(v) As far as the show-cause notice dated 23.7.2012 as during this period there was no amount outstanding due to default in monthly payment, therefore, SCN is not at all sustainable. What was payable on 5.7.2011 can, at the most, be considered as arrears of revenue and Rule 8(3A) is not applicable in respect of arrears of revenue.

(vi) The LB decision in Shiv KripaIspat Pvt. Ltd. 2009-TIOL-388-CESTAT-MUM-LB, is adverted to emphasize that since no goods have been seized or confiscated no redemption fine is imposable.

(vii) Penalty u/r 25 of CER cannot be imposed in view of Gujarat High Court decision in the case of Saurashtra Cement Ltd. 2010-TIOL-889-HC-AHM-CX.

The Revenue representative reiterated the facts and while justifying the order of the adjudicating authority relied upon the decision of Madras High Court inUnirolsAirtex vs. Assistant Commissioner of Central Excise, Coimbatore - 2013-TIOL-684-HC-MAD-CX and the Karnataka High Court decision in the case of M/s. Manjunatha Industries vs. CCE, Bangalore - 2013-TIOL-285-HC-KAR-CX .

The Bench rejected the preliminary contention of the appellant that they have made good the default committed in October 2010 by debiting in CENVAT Credit account on 25th Nov. 2010 by adverting to the first proviso to Rule 3(4) of the CCR, 2004.

And further observed - "Admittedly, they did not have balance in CENVAT Credit account as on 31st Oct. 2010 to pay the defaulted amount of Rs. 7,92,871/-. In view of this provision, we reject this contention of the appellants. The default period is from 6.12.2010 to 4.7.2011. Rule 8(3A) of the Central Excise Rules very specifically provides that the assessee shall pay excise duty for each consignment at the time of removal without utilizing CENVATcredit till the date the assessee pays the outstanding amount, interest thereof and penalty…."

However, while agreeing with the appellant that the goods cleared during 6.12.2010 to 4.7.2011 are deemed to be cleared without payment of duty and the duty amount will be required to be recovered as arrears of revenue, the Bench, after extracting the order of the Madras High Court in the case of UnirolsAirtex (supra) held that even when the said amount is required to be paid as arrears of revenue the same will have to be paid in cash without utilization of the CENVAT credit since any other interpretation of rule 8(3A) of CER would make the restriction relating to utilization of credit meaningless. The Bench further observed that it is settled law that what is not allowed directly cannot be allowed/claimed indirectly and hence the Board's circular dated 28th March, 2012 cited by the appellant will not be applicable. In fine, it was held thus -

"We, therefore, hold that the appellants are required to pay an amount of Rs. 8,00,09,346 which is equivalent to the CENVAT credit utilized during the period 6.12.2010 to 4.7.2011 in cash. They will, however, be free to take CENVAT credit of equivalent amount and utilize it for future clearances."

The Commissioner's order regarding imposition of interest in respect of the first SCN was also upheld; in view of the LB decision in Shiv KripaIspat Pvt. Ltd. (supra) confiscation and imposition of redemption fine was set aside and penalty imposed u/r 25 of CER, 2002 was also set aside citing the Gujarat High Court decision in Saurashtra Cement Ltd. (supra).

In the matter of the second SCN dated 23/07/2012, the Bench observed -

"9. …, since we have held that non-payment of duty as stipulated under Rule 8(3A) during the period December 2010 to 4.7.2011 is not default in monthly payment of duty as envisaged under Rule 8(1) of the Central Excise Rules, the demand under the said show-cause notice is to be considered as recovery of arrears. There is no restriction to utilize the CENVAT credit in respect of goods cleared subsequent to making good of default. Accordingly, we set aside the demand raised in the demand notice dated 23.7.2012. Consequently, interest, penalty, redemption fine are also set aside."

The appeals were disposed of in above terms.

(See 2014-TIOL-344-CESTAT-MUM)

Dear Friends, CBDT has recently issued Circular No. 07/2014 dated
04-.03.2014 regarding due date of filing of TDS return for the period
F.Y. 2012-13 and 2013-14. This circular has been issued in the
interest of deductors who have submitted their tds return after due
date and Income Tax Department has raised their notice for late
filing of TDS return. Now , due date has been fixed 31.03.2014 for
the period 01.07.2012 to 31.12.2013 means Q2 to Q4 for F.Y. 2012-13
and Q1 to Q3 for F.Y. 2013-14.

Circular No. 07/2014
F. No. 275/27/2013-IT(B)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
New Delhi, the 4th March, 2014
All Chief Commissioners of Income-tax
All Directors General of Income-tax

Sub: Ex-post facto extension of due date for filing TDS/TCS statements
for FYs 2012-13 and 2013-14 - regarding

The Central Board of Direct Taxes ('the Board') has received several
petitions from deductors/collectors, being an office of the Government
('Government deductors'), regarding delay in filing of TDS/TCS
statements due to late furnishing of the Book Identification Number
(BIN) by the Principal Accounts Officers (PAO) / District Treasury
Office (DTO) / Cheque Drawing and Disbursing Office (CDDO). This has
resulted in consequential levy of fees under section 234E of the
Income-Tax Act, 1961( 'the Act').

2. The matter has been examined. In case of Government deductors, if
TDS/TCS is paid without production of challan, TDS/TCS quarterly
statement is to be filed after obtaining the BIN from the PAOs / DTOs
/ CDDOs who are required to file Form 24G (TDS/TCS Book Adjustment
Statement) and intimate the BIN generated to each of the Government
deductors in respect of whom the sum deducted has been credited. The
mandatory quoting of BIN in the TDS/TCS statements, in the case of
Government deductors was applicable from 01-04-2010. However, the
allotment of Accounts Officers Identification Numbers (AIN) to the
PAOs/DTOs/CDDOs (a pre-requisite for filing Form 24G and generation of
BIN) was completed in
F.Y. 2012-13. This has resulted in delay in filing of TDS/TCS
statements by a large number of Government deductors.

3. In exercise of the powers conferred under section 119 of the Act,
the Board has decided to, ex-post facto, extend the due date of filing
of the TDS/TCS statement prescribed under subsection (3) of section
200 /proviso to sub-section (3) of section 206C of the Act read with
rule 31A/31AA of the Income-tax Rules, 1962. The due date is hereby
extended to 31.03.2014 for a Government deductor and mapped to a valid
AIN for -

(i) FY 2012-13 - 2nd to 4th Quarter
(ii) FY 2013-14 - 1st to 3rd Quarter

4. However, any fee under section 234E of the Act already paid by a
Government deductor shall not be refunded.

5. Timely filing of TDS/TCS statements is essential to ensure timely
reconciliation of Government accounts and for providing tax credit to
the assessees while processing their Income-tax Returns. Therefore, it
is clarified that the above extension is a one time exception in view
of the special circumstances referred to above. Since the Government
deductor and the associated PAO/ DTO/ CDDO belong to the same
administrative setup that regulates the clearance of expenditure, the
deductors/collectors may be advised to co-ordinate with the respective
PAO/DTO/CDDO to ensure timely receipt of BIN/filing of TDS/TCS
statements.

6. This circular may be brought to the notice of all officers for compliance.

7. Hindi version shall follow.

(Sandeep Singh)
Under Secretary to Government of India
Copy to:
1. The Comptroller and Auditor General of India (40 copies)
2. All Secretaries of Government of India
3. Chief Secretaries/ Administrators of all the States and Union
Territories of India
4. The DGIT (Systems) New Delhi for necessary action
5. The Director General of Income-tax, NADT, Nagpur
6. The Director (PR, PP & OL), Mayur Bhawan, New Delhi for printing in
the quarterly tax bulletin and for circulation as per usual mailing
list (100 copies)
7. DIT (Systems-II), Commissioner of Income-tax, (CPC) TDS, Vaishali
8. All Commissioners of Income-tax (TDS)
9. Guard file

2011-TIOL-321-HC-DEL-IT

IN THE HIGH COURT OF DELHI

Case Tracker

CIT Vs PADMINI TECHNOLOGIES LTD (SUPREME COURT OF INDIA)
DCIT Vs PADMINI TECHNOLOGIES LTD (ITAT)

ITA No.1621/2010

COMMISSIONER OF INCOME TAX

PADMINI TECHNOLOGIES LTD

A K Sikri and Suresh Kait, JJ.

Dated: December 21, 2010

Appellants Rep by: Mr Sanjeev Sabharwal, Sr. Standing Counsel with Mr Utpal Saha, Adv.
Respondent Rep by: Mr Santosh Aggarwal, Adv.

Income tax – Sections 68, 147 – Whether where the Central Excise & Customs Settlement Commission states that there is no overinvoicing of export, the addition made u/s 68 on the basis of the report of the DRI on the same issue is not sustainable particularly when there is no evidence that the Revenue has not accepted the order of settlement commission.

Regular assessment was made u/s 143(3) – on the basis of a report from DRI that the sales of the assessee was over invoiced to show its export obligations had been fulfilled, enquiries were conducted and it was concluded that the real value of exports shown by the appellant company was merely Rs.2,35,12,236/- as against over invoiced exports values at Rs. 40,47,38,019/- - reassessment proceedings u/s 147 were initiated by issuing notice u/s 148 – in response to the notice issued, the return was filed at nil income – notices were issued u/s 143(2) and 142(1) – assessee took the shelter of petition filed against the order of Excise Settlement Commission – AO held that the order to admit the matter was not the final order and treated Rs.38,12,25,856/- as income of the assessee under section 68 of the Act – CIT(A) dismissed the appeal of the assessee.

ITAT allowed the appeal of the assessee and set aside the matter to CIT (A) to frame the appellate order after considering the final order passed by the Settlement Commission and the letter of Directorate of Enforcement. On the basis of the said order of ITAT, the CIT (A) made a fresh order and allowed the appeal of the assessee observing that the charges of over invoicing had not been conclusively proved by the Revenue, there was no allegation of any Hawala payment or any evidence that the proceeds received were in respect of anything other than the export of goods in question, the liability accepted by the assessee was only in respect of non-fulfillment of export obligation which in any case had nothing to do with sales already made for which addition had been made and no show cause notice was ever issued for over invoicing by the Directorate of Enforcement as there was no evidence to that effect – ITAT dismissed the appeal of the revenue on the said order of the CIT(A).

In appeal before the Hon'ble High Court, the revenue contended to verify as to whether the department has accepted the order of the Settlement Commission or not as this question had substantial bearing on this appeal.

After hearing both the parties, the High Court held that,

++ a substantial time has passed since the passing of that order but no reply has been filed by the Revenue on the issue of acceptance of the order of the settlement commission. Silence on the part of the Revenue is construed as confirmation of the acceptance of the order of the Settlement Commission as it seems that the Department is unwilling to proceed with the matter.

Revenue's appeal dismissed

JUDGEMENT

Per: A K Sikri:

1. The present appeal is filed by the Revenue against the order of the ITAT dated 4.9.2009 thereby confirming the order of the CIT(A) to the effect of deleting additions to the tune of Rs.38,12,25,856/- made by the AO under section 68 of the Income Tax Act (hereinafter referred to as the Act).

2. To narrate the genesis of instant dispute, the facts are succinctly produced as under:

The regular assessment under section 143(3) of the Act, in respect of the assessee herein M/S Padmini Technologies Ltd, for the assessment year 1997-98, was completed on 31.03.2001. Subsequently, the Department received a report from the Directorate of Revenue Intelligence that the assessee M/S Padmini Technologies Ltd., which had obtained 25 advance licenses from Director General of Foreign Trade under DEEC scheme for duty free imports, has grossly over invoiced export of CD ROMs to show its export obligations as having been fulfilled. It was alleged in the aforesaid report that the assessee had partly sold a few of these licenses to various importers for duty free imports. This report, on the basis of enquiries conducted, concluded that the real value of exports shown by the appellant company is merely Rs.2,35,12,236/- as against over invoiced exports values at Rs. 40,47,38,019/-. The report of the Revenue intelligence was categorical in its finding that all this has resulted in evasion of custom duties and contravention of various revenue laws of the country. In pursuance of this alarming report, the department initiated reassessment proceedings under section 147 of the Act.

3. The assessee, having received the notice dated 28.03.2002, issued by the department under section 148 of the Act filed its return dated 26.04.2002 thereby declaring its income as �NIL'. Notices under section 143(2) and Section 142(1) along with a questionnaire were also issued, in response to which detailed submissions were filed by the assessee. Meanwhile, the assessee, feeling aggrieved with the findings of the Revenue Intelligence, filed a petition before the Custom and Central Excise Settlement Commission (C&CESC) (hereinafter referred to as the Settlement Commission) which was admitted vide its order dated 5.8.2002. Admission of this petition was taken as a defense by the assessee before the AO but this submission could not produce the desired effect as the AO was of the opinion that the order to admit the matter was not the final order. The AO calculated the unexplained amount at Rs.38,12,25,856/- and treated it as income of the assessee under section 68 of the Act.

4. The appeal preferred by the assessee before the CIT(A) was of no consequence as the CIT(A) confirmed the additions made by the AO. Meanwhile, the Revenue went in appeal against the admission order passed by the Settlement Commission. Civil writs bearing no. 3549/2003 and 3565/2003, which pertain to this appeal, were disposed of by this court vide its order dated 20.11.2004 with the directions to the Settlement Commission to dispose of the proceedings expeditiously after permitting the petitioner therein to produce documentary evidence on record on which the reliance was place by the revenue and thereafter examine all the issues on law and facts. The Settlement commission passed its final order no. F-287-289/CUS/05-SC (PB) on 31.05.2005. The relevant portion of the aforesaid order is as under:

�10.9. The Bench, therefore, observes that the applicant has succeeded in establishing that the Revenue has not substantiated their charges of over valuation of exports. Still it is debatable whether the disclosure of duty liability made by the PPL was full and true, and whether t5hey have cooperated with the proceedings to determine the correct additional duty liability, if any, when they have limited themselves to plead that the Revenue has not substantiated their charges of over invoicing of their exports. The Bench would like to recall its observations in para 10.5 above that all the indications appear to support the allegations of over valuations of exports, though the Revenue has not been able to substantiate it with evidence. Accordingly, in the subject proceedings of settlement, where immunities depends upon full and true duty disclosure and not on the applicant merely being able to prove that no case has been made out in the SSN, the Bench holds that the in applicant may not qualify for total full immunities. In any event, prosecution in this case having already been launched by the revenue, there would be no question of immunity from prosecution at this stage. The co applicants would be eligible for immunities to the extent granted to the main applicant.

11. taking into account the above facts and circumstances, the applications are settled under Sec. 127C (7) of the Customs Act, 1962 subject to the following terms and conditions:-

(1) The applications are settled with additional duty liability of Rs.33,37,275/- admitted by M/s Padmini Polymer Ltd., i.e. to the extent corresponding to their failure to meet the export obligation. The applicant has already deposited Rs.2.5 crores voluntarily even as per the SCN, against which the presently settled duty of Rs.33,37,257/- has already been ordered to be appropriated and adjusted by the Admission Order dated 5-8-02. The balance amount of duty deposit, if any, may be refunded to M/s Padmini Polymers Ltd. after adjustment of penalty and interest ordered below, on an application to be filed by them and as per the due process of law.

(2) M/s Padmini Polymers Ltd. shall pay simple interest @ 10% p.a. on the above settled duty liability under Section 28AB of the Customs Act 1962. The Revenue shall calculate and communicate to M/s Padmini Polymers Ltd the interest amount due at the above rate on the above said amount within 15 days from the receipt of this order. M/s Padmini Polymers Ltd shall pay the said amount within the next 15 days from the date of receipt of the communication from Revenue and report compliance to the Revenue and the Bench.

(3) The Bench imposes of a penalty of Rs. Rs.10,00,000/- on M/s PPL and Rs.5,00,000/- on Shri Vivek nagpal, its Managing Director and grant immunities in excess of the same to the above two applicants and total immunity from penalty on the other co applicants, under the provisions of Customs Act, 1962.

(4) Immunity is granted from confiscation and consequent fine under the provisions of Customs Act, 1962,
12.0 The above immunities are granted under sub Section (1) of Sec 127H of the Customs Act 1962. Attention of the applicants is drawn to the provisions of sub Section (2) and (3) of section 127 H, ibid. The order of the settlement shall become void if it is subsequently found by the Settlement Commission that it has been obtained by fraud or misrepresentation of facts."

5. On the other hand, feeling aggrieved by the order of the CIT(A), the assessee preferred an appeal before the ITAT. The ITAT set aside the order of the CIT(A) in this appeal no. 119/2003-03 and sent the matter back to the CIT(A) to frame denovo appellate order after considering the final order passed by the Settlement Commission and the letter of Directorate of Enforcement dated 2.03.2005 and also after allowing due opportunity of hearing to the parties.

6. The CIT(A), after considering the matter in accordance with the directions passed by the ITAT came to the following conclusions:

�That the charges of over invoicing have not been conclusively proved by the Revenue. The evidence put forth in this regard can utmost be said to be in the realm of speculation.

That there is no allegation of any Hawala payment or any evidence that the proceeds received were in respect of anything other than the export of goods in question.

The liability accepted by the assessee is only in respect of non-fulfillment of export obligation which in any case has nothing to do with sales already made for which addition has been made. No show cause notice was ever issued for over invoicing by the Directorate of Enforcement as there was no evidence to that effect.

That the appellant has succeeded in establishing that the Revenue has not substantiated their charge of over valuation.�

7. On the basis of the conclusions, as mentioned above, the CIT(A) vide its order dated 26.03.2009 extirpated the addition of Rs. 38,12,25,856/- made by the AO in the assessment order passed under section 147. The operative portion of the CIT(A)`s order is as under:

�In view of the aforesaid categorical findings of C&CESC in its order dated 31.05.2005, it is evident that there is no justification to draw any adverse inference against the assessee regarding the export sale proceeds of Rs. 40,47,38,019/-. The Assessing Officer has drawn the adverse inference solely on the basis of show cause notice and in my considered opinion the conclusions drawn by the Assessing Officer cannot be now sustained in view of the categorical findings of the Settlement Commission. On these facts and circumstances, the addition of Rs.38,12,25,857/- as made by the Assessing Officer cannot be sustained and is, therefore, deleted.�

8. The ITAT, vide its order dated 4.09.2009, refused to interfere with aforesaid order of the CIT(A) as it could not found any infirmity in the same. Though the Revenue took a plea before the ITAT that the Custom Department has not accepted the order of the C&CESC and has filed an appeal before the High Court but the ITAT was of the view that this could not be a reason to interfere with the order of the CIT(A). Another contention of the Revenue that the CIT(A) has completely relied upon the order of the C&CESC and failed to appreciate the overwhelming evidence against the assessee brought by the AO could not bear any fruit as the Tribunal was categorical in its finding that it is clearly mentioned in the letter dated 2.03.2005 of the Directorate of Enforcement that the assessee and its directors have not been issued with any SCN for over invoicing, as there was no evidence to that effect.

9. Hence comes this appeal to us. This court, in the instant appeal, vide order dated 2.11.2010, had directed Mr. Sabharwal, Ld. Counsel for the Revenue, to verify as to whether the department has accepted the order of the Settlement Commission or not as this question has substantial bearing on this appeal. On the last date of hearing on 7.12.2010 the Ld. Counsel for the appellant-Revenue could not verify the same as he had not received any instruction from the Department. In view of this, one week time was further granted with the condition that if the instructions are not received even on the next date, this court shall presume that the Department has accepted the order of the Settlement Commission. A substantial time has passed since the passing of that order but no reply has been filed by the Revenue on this issue. We construe this silence on the part of the Revenue as confirmation of the acceptance of the order of the Settlement Commission as it seems that the Department is unwilling to proceed with the matter.

10. In view of the above, we are of the opinion that there is no infirmity in the approach adopted by the ITAT in upholding the order of the CIT(A) dated 26.03.2009, which was passed in accordance with the final order of the Settlement Commission as the same has been impliedly accepted by the Revenue.

11. No question of law arises. This appeal is dismissed accordingly.

--
Regards,

Pawan Singla , LLB

when I compared M S Shoes , Mr Sood , the name of the other company is Padmini Polymens Limited . M S SHoes Direcor was sent to jail and Padmini !!!!!! In fact the company did not given any deliver of shares to shareholder and price of the shares wer touched high Rs 375 in market. My one of the friend was allotted the shares and did not receive the share certificate. When I sent a letter by speed post on the other day they started making calls . Said that the shares were sent to allottees but by post return back to them and it is in torn off condition . Therefore they said that it will take some time to print again and send it. But it was not fact. I turned up their apology and I asked to sent it immediately. It was sent within two days!!!!! Not the name has been changed!!! Delhi Ka .......................

Sebi vs Padmini Technologies Limited And ... on 31 January, 2007

Bench: G Anantharaman

ORDER

G. Anantharaman, Member

1. BACKGROUND.

1.1 M/s Padmini Technologies Ltd. (hereinafter referred to as 'Padmini') was originally incorporated as a private limited company on February 02, 1990 under the name Padmini Packaging Pvt. Ltd. The name of the said company (Padmini Packaging Pvt. Ltd.) was changed to Padmini Technologies Ltd. in the following manner (Table 1).

Old name

New name

Effective Date

Padmini Packaging Pvt. Ltd.

Padmini Polymers Pvt. Ltd

December 23, 1992

Padmini Polymers Pvt. Ltd

Padmini Technologies Ltd.

June 14, 2000

1.2 The shares of Padmini were interalia listed at the Stock Exchange Mumbai, now known as The Bombay Stock Exchange Ltd. (hereinafter referred to as 'BSE'), Delhi Stock Exchange Association Ltd. (hereinafter referred to as 'DSE') and National Stock Exchange of India Ltd. (hereinafter referred to as 'NSE'). It was noticed that the price of the shares of Padmini had increased from Rs. 60.95/- on December 13, 1999 to Rs.266/- on March 09, 2000/- at DSE. Thereafter, the price of the shares of Padmini had moved as stated below (Table 2):

Date

Price (Rs.)

May 15, 2000

47/-

June 05, 2000

60.25/-

July 06, 2000

118.10/-

August 8, 2000

55.65/-

August 29, 2000

201.55/-

It was observed that the increase in the share price of Padmini was coupled with the increase in the traded volume at DSE. Similar pattern of trading was observed in all other stock exchanges. The trading in the shares of Padmini thereby witnessed price fluctuations and unusual price movement at the stock exchanges.

1.3 In view of the unusual price movement as mentioned above, Securities and Exchange Board of India (hereinafter referred to as 'SEBI') conducted investigations to look into the possible price manipulation in the shares of Padmini and inter alia the role of Padmini, its directors and others in respect of the said alleged manipulation. The investigation conducted by SEBI inter alia found that the Padmini (erstwhile Padmini Polymers Ltd.) had made preferential allotment of 2,00,00,000 equity shares for cash at par to the persons/entities in the year 1999, the details of which are mentioned below (Table 3):

Sl. no

Allotment Date

Name of allottees

Shares allotted

Paid up value (Rs/share)

31.5.1999

Unit Trust of India

2000000

20.6.1999

Contessa Commercial Co. P Ltd.

900000

2.5

-do-

Bllumenfeld Ltd.

900000

-do-

Jiwansagar Promoters Pvt. Ltd.

900000

2.5

-do-

Bhagwandas Sagarmal

900000

2.5

-do-

Raj Kumar Kishorepuria

900000

2.5

-do-

Pramod Kumar Kishorepuria

900000

2.5

-do-

Alok Khetan

900000

2.5

-do-

Savara Tie-up P Ltd.

900000

2.5

-do-

Royal Bengal Exports Pvt. Ltd.

900000

2.5

-do-

S Beriwal

900000

2.5

-do-

Prakash Kumar Damani (HUF)

900000

2.5

-do-

Prakash Kumar Damani,

900000

2.5

-do-

Cama Enterprises P Ltd.

900000

2.5

-do-

Zinga Chemicals P Ltd

900000

2.5

-do-

Hermonite Consultants P Ltd.

900000

2.5

-do-

Cherry Marketing P Ltd.

900000

2.5

-do-

HT Ferro P Ltd.

900000

2.5

-do-

Hermonite Surgicals P Ltd.

900000

2.5

-do-

V B Impex P Ltd.

900000

-do-

J P Promoters P Ltd.

900000

Total

2,00,00,000

1.4 For the sake of convenience, the aforesaid allottees (except Unit Trust of India) are broadly categorized into the following two groups:

a) entities at Sr. no.2 to 13 - Kolkatta based allottees.

b) entities at Sr. no.14 to 21 - Delhi based allottees.

1.5 The investigations conducted by SEBI found that Shri Vivek Nagpal, (promoter/director of Padmini) had made a presentation at Hotel Taj Bengal, Kolkata around March-April 1999 about the prospects of Padmini and its aforesaid preferential allotment. The said presentation was attended by all the Kolkata based allottees amongst others. It prima facie appeared that, in the presentation made by Padmini at Kolkata, one Shri Sunil Kishorepuria represented the entities/persons listed at Sr. nos. 2 to 7 in Table 3 above. It further transpired that Shri Sunil Kishorepuria was known to Padmini and Shri Vivek Nagpal since 1993-94, as he had business dealings with them and that Shri Sunil Kishorepuria had served as the main contact point for facilitating preferential allotments to other Kolkata based allottees. It has been further alleged that the aforesaid allottees were mere name-lenders. Further, it appeared that Padmini had agreed that the cheques of the allottees would be presented for collection only after obtaining their consent.

1.6 It was found that the preferential allottees of Padmini were shown in the category of "other than promoter group" and therefore, the said preferential shares were not subject to lock-in. It was further observed inter alia that Padmini had not submitted the copy of the Board Resolution to the Stock Exchanges in respect of the aforesaid preferential allotment, and thereby, prima facie violated the provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the 'Takeover Regulations'). Therefore, SEBI had issued a notice dated July 24, 2002 to Padmini asking it to show cause as to why appropriate directions should not be issued against it for the alleged violations as mentioned in the said show cause notice.

1.7 In the course of investigation, it was found that Padmini had allotted preferential shares to the Kolkata Based and Delhi based allottees without the actual receipt of the application/allotment money. Subsequent to the allotment, the said allottees had sold the preferential shares allotted to them, in off-market transactions to various entities including Ketan Parekh group consisting of Classic Credits Ltd., Panther Fincap & Management Services Ltd. & Triumph International Finance India Ltd. who had later introduced the said shares in the secondary market. The aforesaid entities are collectively referred to as 'KP entities' for the sake of brevity. The funds received from the KP entities and other buyers against the sale of the aforesaid preferential shares were paid back by the original allottees towards the application/allotment money. Thereafter, the cheques given by the allottees for payment towards the application/allotment money were presented and realised by Padmini.

1.8 The examination of the bank account of Kolkata based and Delhi based allottees revealed that, in most of the cases, cheques issued by them towards the application/allotment money (for the preferential shares of Padmini) were cleared for payment only after they had sold their preferential shares in the manner mentioned above. Further, as a matter of fact, the cheques issued by majority of the Kolkata Based and Delhi based allottees were cleared or payments were made to Padmini much after the listing of the aforesaid preferential shares at DSE (Regional Stock Exchange for Padmini) on December 23, 1999. However, Padmini got its preferential shares listed for trading at DSE on the said date on the strength of certain certificates (which showed the receipt of funds against the allotments) issued by Padmini, promoter director (Shri Vivek Nagpal) and Shri Kailash Chandra Agrawal, partner of M/s Ashok Amar & Associates, Chartered Accountants (statutory auditors of Padmini). BSE had given the listing approval for the said preferential shares on December 30, 1999. The aforesaid certificates facilitated Padmini to obtain the listing approval and the shares thus listed were off loaded in the market by KP entities and thereby they had manipulated the price of the shares of Padmini to the detriment of the genuine investors.

1.9 The unusual financial accommodation provided by Padmini to the said Delhi and Kolktata based allottees indicated that they did not have their own financial standing to acquire such a large quantity of shares. This was also corroborated from their bank statements that they did not have requisite funds at the time of issue of cheques for purchase of shares. As such, the said allottees had served as a temporary parking point and later as a conduit for channelising the shares to KP entities. It has been alleged that there was nexus between KP entities and the promoter of Padmini and that Padmini and its promoters played a major role in the manipulation of the share price of Padmini. SEBI had also found that there were delay in transfer / demat of shares of Padmini.

1.10 The aforesaid acts of Padmini and its whole time directors were prima-facie in violation of regulation 3, 6(a), (c), (d) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1995 (hereinafter referred to as the FUTP Regulations) and the provisions of Section 113 of the Companies Act, 1956.

2. SHOW CAUSE NOTICE, REPLIES AND HEARING

2.1 In the facts and circumstances, a notice dated February 20, 2004 to Padmini and its Whole Time Directors, Shri Vivek Nagpal, Shri Vishnu Sarup Gupta and Shri Praveen Kumar Jain asking them to show cause as to why proceedings under section 11B of the Act read with regulation 12 of the FUTP Regulations should not be initiated against them for inter-alia debarring them from associating with the capital market related activities, dealing in securities, accessing the capital market in any capacity whatsoever and associating with any of the intermediaries in the capital market for appropriate period, for the aforesaid alleged violations as mentioned above.

2.2 In the above show cause notice a reference was also made by SEBI in respect of its earlier show cause notice dated July 24, 2002 issued to Padmini. Padmini filed its reply to the said show cause notice vide letter dated February 19, 2003 and the same would be dealt with separately and independent of the present proceedings.

2.3 In respect of the show cause notice dated February 20, 2004, Padmini vide letter dated February 28, 2004 inter alia sought from SEBI a copy of all documents, correspondences, depositions, press cuttings and any other information based on which the captioned show cause notice had been prepared and all other documents which were being relied upon by SEBI to frame charges against them, in order to give para wise and specific reply of each and every averments. Further they sought inspection of the same.

Some of the documents sought for inspection are as under:

(a) Copy of the inspection report

(b) Depositions, statements and all correspondence with

i) Ketan Parekh

ii) Classic Credit Ltd.

iii) Panther Fincap & Management Services Ltd.

iv) Triumph International Finance Ltd.

v) Delhi Stock Exchange

vi) Bombay Stock Exchange

vii) NSDL

viii) Punjab National Bank

ix) Banks

x) ROC

xi) Hotel Taj Bengal

xii) Sunil Kishorepuria

xiii) Prakash Kumar Damani

xiv) Sanjay Kumar

xv) Cherry Marketing P. Ltd.

xvi) Hermonite Surgicals P. Ltd.

xvii) Zinga Chemicals P. Ltd.

xviii) Hermonite Consultants P. Ltd.

xix) HT Ferro P. Ltd.

xx) Cama Enterprises P. Ltd.

xxi) Arun Goenka

xxii) Umesh Goenka

xxiii) Kishan Goenka

xxiv) SBI Mutual Fund including the research report if any

xxv) VB Impex P. Ltd.

xxvi) JP promoters P. Ltd.

xxvii) Vinod Kumar

xxviii) Pradeep Kumar

xxix) Churuwala Exports P. Ltd.

xxx) DKG Buildcon P. Ltd.

xxxi) Iris Infrastructural P. Ltd.

xxxii) Mikona Impex & Traders P. Ltd.

xxxiii) Ashok Amar & Associates

xxxiv) Kailash Chand Agarwal

xxxv) Copies of complaints of 320 investors

xxxvi) Inspection Report of transfer/ demat records of Padmini taken by SEBI on 2.8.2001.

xxxvii) VS Gupta

xxxviii) Ex-president of DSE

2.4 It was also stated in the said letter that it reserved the right to cross-examine all the persons whose statements, depositions and information had been relied upon by SEBI in respect of the charges framed against them. Despite providing a detailed show cause notice with annexures which contained details of the allegations, Padmini and its whole time directors had not filed their submissions on merits. Instead, they had sought for various

correspondences/statements/information as specified above. In the circumstances, as no reply was received from Padmini and its whole time directors to the aforesaid show cause notice (dated February 20, 2004), a reminder was sent by SEBI vide letter dated March 15, 2004. Shri Vijay Sarup Gupta and Shri Praveen Kumar Jain, vide their letters dated March 22, 2004 reiterated the request made by Padmini for the inspection of documents. Further, in their aforesaid letters, there was an encore of the very same request made in the earlier letters.

2.5 They further added that they were neither in charge of the affairs of Padmini nor involved in its day to day management. It was clarified that Shri Vivek Nagpal, the promoter/ director of Padmini was solely in charge of the affairs and day to day management of the Padmini. It was stated that they could not be held guilty and liable for any act of Padmini only on account of their fiduciary relationship with it. They further clarified that in terms of Section 27 of the Act, a person shall be liable for an alleged offence by the company only if the same was committed with his knowledge and he had failed to exercise due diligence to prevent the commissioning of such an alleged offence. It was urged that they had no knowledge of the alleged offence and that they had exercised the required due diligence on their part and that the alleged offence has not been committed with their consent or connivance and could not be attributed to any neglect on their part. Except the submissions with respect to the provisions of Section 27 of the Act, the rest of the contentions made by them were nothing but a reproduction of the reply of Padmini dated February 28, 2004. It was also not clear as to why they required the inspection of various documents, when their contention was that they were not in charge of the affairs of Padmini and it was Shri Vivek Nagpal who was in charge of the said affairs and the day today management of Padmini. Shri Vivek Nagpal vide letter dated March 25, 2004 made similar submissions as that of Padmini (vide letter dated February 28, 2004).

2.6 However, the aforesaid requests for the inspection of documents made by of Padmini and its aforesaid whole time directors were examined by SEBI and the same was granted by SEBI. The said opportunity was availed by them on August 11, 2004. Pursuant to the aforesaid inspection, Padmini and its aforesaid whole time directors vide letter dated August 13, 2004 further requested for the copies of the following documents:

(a) copy of investigation report

(b) deposition made, statement recorded and all correspondences exchanges with parties:

i) Contessa Commercial Co. P. Ltd., Kolkatta

ii) Blumenfeld Ltd., Kolkatta

iii) Jiwansagar Promoters P. Ltd., Kolkatta

iv) Bhagwandas Sagarmal, Kolkatta

v) Raj Kumar Kishorepuria, Kolkatta

vi) Pramod Kumar Kishorepuria, Kolkatta

vii) Alok Khetan, Kolkatta

viii) Savera Tie-up P. Ltd., Kolkatta

ix) Royal Bengal Exports P. Ltd., Kolkatta

x) S. Beriwal, Kolkatta

xi) Prakash Kumar Damani (HUF), Kolkatta

xii) Prakash Kumar Damani, Kolkatta

xiii) Cama Enterprises P. Ltd.,

xiv) Zinga Chemicals P. Ltd., Delhi

xv) Hermonite Consultants P. Ltd., Delhi

xvi) Cherry Marketing P. Ltd., Delhi

xvii) HT Ferro P. Ltd., Delhi

xviii) Hermonite Surgicals P. Ltd., Delhi

xix) VB Impex P. Ltd., Delhi

xx) JP Promoters P. Ltd. Delhi

xxi) Ketan Parekh

xxii) Classic Credit Ltd.

xxiii) Panther Fincal & Management Services Ltd.

xxiv) Triumph International Finance Ltd.

xxv) Delhi Stock Exchange

xxvi) Bombay Stock Exchange

xxvii) NSDL including data regarding deterialisation

xxviii) Punjab National Bank-including letters dated January 14, 2002 & November 21, 2001

xxix) Banks referred to in the show cause notice

xxx) Sunil Kishorepuria

xxxi) Prakash Kumar Damani

xxxii) Sanjay Kumar

xxxiii) Arun Goenka

xxxiv) Umesh Goenka

xxxv) Kishan Goenka

xxxvi) Correspndence, if any, exchanged with SBI Mutual Fund, seeking details in the manner.

xxxvii) Vinod Kumar

xxxviii) Pradeep Kumar

xxxix) Churuwala Exports P. Ltd.

xxxx) DKG Buildcon P. Ltd.

xxxxi) Iris Infrastructurals P. Ltd.

xxxxii) Mikona Impex & Traders P. Ltd.

xxxxiii) Ashok Amar & Associates

xxxxiv) Kailash Chand Agarwal

xxxxv) Ex-president of DSE referred to in the SCN

(d) copies of contract notes issued by Triumph to SBI Mutual Fund

(e) copy of written presentation made by Padmini to SBI MF

(f) copies of media reports regarding delay in transfer and

(g) copy of inspection report of transfer/ demat records of Padmini taken by SEBI on August 2, 2001.

2.7 Pursuant to the above letter of Padmini and its whole time directors, SEBI vide letter dated September 27, 2004 forwarded the copies of the following documents to them:

(a) Copy of letter dated February 9, 2002 issued by DSE regarding non-compliance of Regulation 3 of the Takeover Regulations by Padmini.

(b) Copy of letter dated September 20, 2001 received from SBI Mutual Fund. The enclosures to the letter includes

(i) Datewise details of delivery received/ given along with dates these shares were sent for transfer/ demat and their receipt from Padmini.

(ii) Date-wise details of Padmini shares purchased by SBI Mutual Fund from Triumph International Finance Ltd., member NSE and other brokers.

(iii) Copy of letter dated February 18, 2000 from Triumph International Finance Ltd., member NSE making offer for purchase of Padmini shares along with other internal notes.

(iv) Data showing that Fund Manager's report was based on presentation made in writing by Padmini.

(v) Fund Manager's report dated February 12, 2000 and January 30, 2001 along with copy of discussion sheet for purchase/ sale.

(vi) Copy of contract note issued by Triumph International Finance Ltd., member NSE to SBI Mutual Fund.

(d) Copy of statement of Shri Kailash Chandra Agarwal, CA dated 11.4.2003.

(e) Copy of statement of Shri BB Sahny (ex-president of DSE) dated 20.11.2002.

(f) Copy of report of SEBI official visiting the premises of Delhi based entities involved in preferential allotment & its purchase.

(g) Copy of statement of Shri RK Verma dated 21.3.2003.

(h) Copy of statement of Shri Jitendra Agarwal dated 3.4.2003.

(i) Copy of statement of Shri Alok Khetan dated 3.4.2003.

(j) Copy of statement of Shri Parkash Kumar Damani dated 4.4.2003.

(k) Copy of statement of Shri Sunuil Kishorepuriua

(l) Copy of statement of Shri Sanjeev Beriwal.

(m) Copy of statement of Shri VS Gupta.

(n) Copy of statement of Shri Sanjay Kumar Gupta dated 4.2.2002.

(o) Copy of statement of Shri Surender Verma dated 10.4.2003.

(p) Copy of statement of Shri Arun Goenka dated 10.4.2003.

(q) Copy of statement of Shri Kishan Goenka dated 11.4.2003.

(r) Copies of discharged cheques issued by VB Impex P. Ltd., JP Promoters P. Ltd. & DKG Buildcon P. Ltd. utilized in preparation of demand drafts in favour of various Kolkatta based allottees.

2.8 Further to the above letter of SEBI, Padmini vide letter dated October 11, 2004 informed that SEBI had not sent the complete documents relied upon by it in the show cause notice dated February 20, 2004 and certain documents (as mentioned below) were yet to be furnished by SEBI :

(a) Correspondence of SBI Mutual Fund with SEBI referred to in the SEBI's report annexed to in the company's petition No.3/2003 filed by DCA with Hon'ble CLB.

(b) Copies of SEBI's correspondence, which have been referred to by SBI Mutual Fund in their replies to SEBI.

(d) Replies of Ketan Parekh to SEBI in the matter.

(e) Replies and statement of Triumph International Finance Ltd. in the matter.

(f) Replies and statement of Panther Fincap & Management Ltd. in the matter.

(g) Replies and statement of Classic Credit Ltd. in the matter.

2.9 It was added in the said letter that "...in the absence of vital documents such as those referred to above, we are not in a position to prepare reply to the show cause notice and send the same to SEBI".

2.10 In the facts and circumstances, Padmini & its whole time directors were further advised to file their reply, by SEBI vide letter dated October 13, 2004. However, Padmini vide letter dated October 20, 2004 informed SEBI that it had been denied inspection as well as copies of the documents as requested by it vide letter dated October 11, 2004. Padmini further requested SEBI to grant time upto November 10, 2004 for filing its reply to the show cause notice of SEBI dated February 20, 2004. In view of the above, an opportunity of hearing was granted by SEBI to Padmini and its whole time directors to appear for a hearing on November 11, 2004 before SEBI. Shri Vivek Nagpal, the Managing Director of Padmini, vide letter dated November 10, 2004 filed his reply to the show case notice dated February 20, 2004.

2.11 In the said reply Shri Vivek Nagpal had inter alia submitted that Padmini had got more than 40000 share holders. With regard to the definition of fraud, it was stated that the Act or the Regulations made thereunder had not declared any act or omission to be fraudulent, at the relevant point of time. In the absence of such declaration, SEBI could not proceed against a person on the ground that the person had acted fraudulently. Therefore, it could not be held that Padmini indulged in any activities, which attracted Clause 5 of Regulation 2(c) of the FUTP Regulations. It was further stated that the impugned show cause notice related to the transactions pertaining to the year 1999 and therefore, the FUTP Regulation which was applicable to the transaction was the one, which was in force in the year 1999, and not the Regulations which came into force, subsequently (the Regulation notified in the year 2003). It was further clarified that from the definition of the expression "fraud" in Regulation 2(c) of FUTP Regulations, the fraud referred to therein was related to a contract and its reach was restricted to the parties to the contract. It was further clarified that, if the allottees had indulged in any alleged fraudulent activities related to the shares, which they got in allotment from Padmini, Padmini could not be held responsible, as the contract between Padmini and the allottees concluded on issuance of the share certificates to the allottees. Further he added that, in any case, Padmini was not a party to the developments subsequent to the allotment of shares in the hands of the allottees and transferees thereafter.

2.12 In respect of the presentation made by Padmini at Kolkata, it was submitted that same was done as a matter of business prudence and in the normal course of business. It was urged that, negative inference could not be drawn against the management of Padmini as it had made presentation in the normal course to the various prospective allottees. It was further submitted that such pre allotment presentation was a normal practice followed by companies and further that there has been no legal prohibition on making such presentation. In this context, it was submitted that in the absence of any complaint from the said allottees, to which the alleged presentation was made, the said charge could not survive. It was urged that the making of presentation by Padmini to the said Kolkata based entities on the contrary suggested its genuine intentions enabling the prospective allottees to take an informed decision and that, if the said Kolkata based allottees were only name-lenders as alleged in the show cause notice and were acting in nexus with Padmini, then there was no need for such presentation to such allottees. It was further submitted that Padmini came to know about acting in concert by the above parties for the first time only on June 10, 1999 when Contessa Commercial Co. Pvt. Ltd. made a disclosure under regulation 7 of the Takeovers Regulations to it regarding their acting in concert with other companies. Contessa Commercial Co. Pvt. Ltd. had made a disclosure that it was acting in concert with Bllumenfield Ltd. Jiwan Sagar Promoters Pvt. Ltd., Promod Kr. Kishorepuria, Raj Kumar Kishorepuria and Bhagawandas Sagarmal.

2.13 It was claimed that Padmini had received cheques from the Kolkata based allottees along with the application forms as per the details given below:

S.No

Name of the Allottee

Shares allotted

Cheque No./ date

Amount (Rs.)

Contessa Commercial Co. Pvt. Ltd.

900000

175826

21.05.1999

90,00,000

Bllumenfield Ltd.

900000

307471

17.05.1999

90,00,000

Jiwan Sagar Promoters Pvt. Ltd.

900000

671542

07.06.1999

22,50,000

Promod Kr. Kisorepuria

900000

915595

25.05.1999

22,50,000

Raj Kumar Kishorepuria

900000

931394

01.06.1999

22,50,000

Bhagawandas Sagarmal

900000

155361

28.05.1999

22,50,000

2.14 In view of the above, it was stated that the allegation that without receiving the consideration amount the shares were allotted by Padmini was baseless. It was submitted that only on receipt of the cheques towards the allotment money, the shares were allotted to the various allottees on June 20, 1999. It was clarified that as per section 69 of the Companies Act 1956, the requirement of receiving cash as a precondition for allotment was applicable only to public issues and there were no such restrictions in the case of a preferential allotment. He further urged that the only requirement was that the consideration against the allotment had to be received and that there was no stipulation that only on encashment of the cheques the shares could be allotted. It was claimed that in the instant case, the allottees had forwarded the applications for shares along with the cheques and the allotment was made only thereafter. In this context he had placed reliance on the judgement of the Hon'ble Calcutta High Court in the matter of P. Khaitan v. Atlas Works Ltd. He had also submitted the copy of the opinion given by Mr. Justice P N Bhagwati (former Chief Justice of India) wherein it was interalia mentioned that "there is no provision either in the Negotiable Instruments Act, 1881 or in the Companies Act, 1956 that cheques received by a person must be presented for payment within a particular period of time or that failure to do so will be an offence."

2.15 It was further added in the said reply that Padmini had been accounting for the receipt of cheque as the receipt of payment pertaining to the date on which the cheque was received. It was stated that the same was like every bank giving credit in account of a client on receipt of a cheque sent for clearing even before knowing that the cheque has been cleared or not and that in consonance with the aforesaid accounting practice followed by the company, the company allotted the shares to the allottees on receipt of cheques from them towards consideration amount. It was further explained that however, after receipt of cheques for allotment of shares, the allottees requested for withholding the cheques for presentation on some grounds. Having made the allotment, the company was left with no other option but to consider their request for delayed presentation, particularly when the market price of the share was ruling below par. In the said compelling circumstances, company was left with little choice but to hold on to the cheques as desired/ requested by the allottees.

2.16 He further denied the allegation that at the instance of Kolkatta based allottees Shri Sanjay Kumar was deputed by the management of Padmini. He had also sought for the cross examination of Shri Sanjay Kumar. He had also claimed that no material was furnished in the show cause notice to establish the nexus between Padmini and the Kolkata based allottees. He further requested for the cross examination of the said Shri Sanjay Kumar. It was stated in the reply that the show cause notice was silent with respect to the connection of the management of Padmini with the VB Impex Group. It was also contended that the nexus theory with Kolkata based allottees was baseless. He further claimed that the turn over of the said allottees was around Rs. 250 crores. In his reply, Shri Vivek Nagpal had also stated that the details about preferential allottees were circulated at the Extra Ordinary General Meeting held on March 24, 1999 and that the details regarding allottees could be obtained from Padmini by any shareholder. In view of the above, it was stated that the inference to the effect that Padmini had conveyed the details of allottees was erroneous. As regards the sale of shares of Padmini to KP entities, it was submitted that the allottees were independent entities and not its part. Further it was stated that the fact that the KP entities had dealt in the shares of Padmini by itself was not a ground to form an opinion that there was a nexus between KP entities and Padmini. In respect of sale of shares to SBI Mutual Fund in an off market deal by KP entities, it was stated that it had no role to play in the buying and selling decision of the said parties.

2.17 It was urged that KP entities were not connected to Padmini and that Padmini had nothing to do with the business of the said KP entities. It was also stated that the details of the preferential allottees were circulated at the Extra Ordinary General Meeting on March 24, 1999. As regards the sale of shares of Padmini to SBI Mutual Fund, it was contended that neither SBI Mutual Fund nor KP entities were under its control. It was clarified by him that from March 03, 2000 onwards, SBI Mutual Fund purchased 12,450 lacs shares of Padmini from the open market and the same reflected the genuine interest of SBI Mutual Fund in the shares of Padmini.

2.18 It was also stated that "without prejudice to above, even if, for arguments sake it was presumed that there was any alleged influence or nexus, after the purchase of 22.045 lac shares of Padmini by SBIMF at an approximate price of Rs.164.50 per share in a "trade for trade" deal through stock exchange from KP entities, its share price had gone up from about Rs.165/- on 21st Feb 2000 to Rs.264/- on 8th March 2000 i.e. appreciation of 62.5%". In this context, he added that had SBIMF purchased the shares of Padmini under any influence or consideration, it could have booked the profit on its investment by that time. It was claimed that, if the said shares, had been sold by SBIMF on 8th March 2000 @ Rs.264.00 per share, SBIMF could have booked a profit of approximately Rs.22.00 crores. On the other hand, SBIMF made further purchases in the company's share. As regards, the out of turn demat of shares lodged by KP entities with Padmini, it was submitted that the said shares were dematerialised in the normal course of business and there was nothing abnormal in the said dematerialisation. It was also stated that KP entities were a large shareholder and as such they would have pursued the matter of transfer of shares vigorously with depository participants.

2.19 In the context of the out of turn demat of shares lodged by KP entities with Padmini, he claimed that the shares were dematerialised in normal course and that there was nothing abnormal in the dematerialisation of the said shares. He further clarified that "K.P. entities were a large shareholder and as such they would have obviously pursued the matter of transfer of shares rigorously with its DP etc. to get the transfer done expeditiously".

2.20 In respect of the allegation of the issue of false certificate for listing, it was stated that Padmini had not indulged in falsification of books and records as alleged and the certificates furnished to the stock exchanges were based on its records. It was also submitted that in so far as the consideration for allotment of shares was concerned Padmini had been accounting for the receipt of cheque as the receipt of payment pertaining to the date on which the cheque was received. As regards the price movement in the shares of Padmini, it was stated that it was in line with the general trend and that there was no manipulation as alleged by SEBI. It was also contended that to hold the charge of violation of regulation 6 (c) of the FUTP Regulations, it had to be proved that the party had intentionally delayed the transfer and also contravened, the provisions of any law. Further in the said reply, the examination of various persons from whom the statements had been taken by SEBI was sought for. It was stated that Padmini had neither intentionally delayed the transfer of securities nor acted in contravention of any law to attract regulation 6 (c) of the FUTP Regulations. He also stated that the provisions of regulation 6(d) of the FUTP Regulations would not be applicable in the present case.

2.21 In respect of the media reports it was stated that "SEBI can not be unaware of the practice of the Company Executives reacting to queries from the press relating to their business prospects and that the statements attributed to CMD of the company are nothing but statements normally made by such executives". As regards the delay in transfer/demat of shares it was clarified that "...it is submitted that Padmini had been maintaining share transfer records for lodgement & dispatch on its computer system, in line with the current trend and paper less system being practiced by companies having a large investor base. The record for lodgement & dispatch of the shares, which were being maintained on the computer system, could, however, not be produced as the system got afflicted with an acute virus." It had further denied that it had given false certificates for getting listing approval from DSE for the preferential shares. It was clarified that whatever certificates submitted to the stock exchanges were based on the records of Padmini. It was also submitted that due to the book closure, there was heavy rush of transfer during the period July 28, 2000 to August 24, 2000 and that the compulsory demat mode (for Padmini's share) was made effective from August 28, 2000. It was stated that the due to the increase on work load, there was some delay in clearing the receipts for transfer/demat. It was clarified that Padmini put cancellation stamp after the completion of the demat process and that no share certificates was left without putting the cancellation endorsement or stamp. It was also stated that there was no intention on the part of the company and therefore, regulation 6 (c) of the FUTP Regulations was not applicable.

2.22 As regards, the non co-operation and non submission of information by Padmini, it was stated that Padmini was undergoing a crisis situation as it was facing non co-operation from its staff due to the non payment of salary. It was clarified that Shri Vivek Nagpal was travelling and his request for adjournment was not considered by SEBI and the available information was provided to SEBI by him on April 17, 2003. He had also stated that an appeal was preferred against the order of adjudicating officer against SAT and the same was pending. He denied that Padmini facilitated manipulation. He also claimed that Padmini was not benefited from the price increase.

2.23 As regards the price movement, Padmini stated that the same was in tandem with the increase in the price of the scrips in the same field. As regards the media reports, it was urged that for everything appearing in the press, the company could not be held responsible. Shri Vivek Nagpal further contended that "...It is further submitted that since this part reply itself demolishes the charges, it is humbly prayed that the Show Cause Notice be set aside and the charges as leveled against me dropped".

2.24 The opportunity of hearing granted to Padmini and its whole time directors was adjourned to November 30, 2004 from November 11, 2004 as per the request of Padmini. In the hearing Shri Dushyant Dave, Sr. Advocate inter alia appeared on behalf of Padmini and its directors. Shri Dushyant Dave made a preliminary submission that his clients had not received the entire documents and in the absence of the said documents, it would not be possible for him to make submissions on behalf of his clients. As all the relied upon documents were furnished to Padmini, SEBI had advised the learned Sr. Advocate to make his submissions on the merits of the case. However, he had opted not to make any submissions on merits. As the entire documents which were relied upon by SEBI had already been furnished to Padmini and its directors, a further opportunity of hearing on December 15, 2004 was granted by SEBI. Shri. T N Subramaian, advocate appeared and submitted on behalf Padmini and its directors that his clients require cross examination as sought by them earlier.

2.25 SEBI vide letter dated August 29, 2005 inter alia informed (Padmini and its directors) about the details of the documents which were relied upon by SEBI while issuing the show cause notice. SEBI had also forwarded the submissions made by various persons whose statements were taken by SEBI.

2.26 Subsequently, an opportunity of hearing was granted to Padmini and its directors by SEBI on December 15, 2005. However, Padmini and its directors had sought for the adjournment of the said hearing. Accordingly, another opportunity of hearing was granted to Padmini and its directors on August 25, 2006. Shri Ganesh Sr. Advocate appearing on behalf Padmini and its directors, however, sought for the adjournment of the hearing on personal grounds. Accordingly, another opportunity of hearing was granted to Padmini and its directors on September 22, 2006. Shri Ganesh, Sr. Advocate appeared and reiterated the request of his clients to cross examine the persons from whom statements had been taken by SEBI. Excepting for the said request, the sr. advocate did not make any submissions on the merits of the case, in spite of specifically conveying to them that their prayer for cross-examination would be dealt with in the final order and that the same should not come in the way of adducing arguments on merits.

2.27 I note that sufficient opportunities were provided by SEBI to Padmini and its whole time directors in compliance of the principles of natural justice, so that they could make their submission/explanation, if any, against the show cause notices issued to them. SEBI had also provided all the documents / information as sought by them except those mentioned in the letter of Padmini dated October 20, 2004. Nothing prevented them from making their submission rebutting the said statements / information. Though they had filed their replies (as mentioned above) to the show cause notices issued by SEBI, they had also requested for the cross examination of all the persons from whom statements had been taken by SEBI. In view of the above, as sufficient opportunities were provided to Padmini and its whole time directors to explain their case against the show cause notices, I consider that no purpose will be served in giving another opportunity of hearing to them. In the sequence of events as adumbrated above, it becomes evident that the party was buying time under some pretext or other; while the successive requests for additional information or inspection were nothing but a ploy in a scheme of dilatory tactics to smother the quasi judicial process in frivolous and vexatious delay. The plea for cross-examination is nothing but a necessary, logical extension of the said ruse to delay and procrastinate. The refusal to adduce arguments on merits despite being told that their plea on cross-examination would be dealt with on merits in the final order is demonstrative of a deliberate cussedness on their part which appears to be a part of a design to delay finality on the substantive issues at this stage. Therefore, there is a strong case to decide on all the issues on the basis of all materials available on record, the letters / reply filed by Padmini and its whole time directors and the material circumstances bearing on the case in the exercise of best judgment, lest the case should be mired in interminable delay, without finality, which would be subserving the parties interests.

2.28 In the above facts and circumstances, I, proceed further with the matter on the basis of the show cause notice issued to Padmini and its directors, the reply dated March 22, 2004 received its whole time directors, reply dated November 10, 2004 received from Shri Vivek Nagpal, other letters received by SEBI (as mentioned above) and other materials available on record.

3. CONSIDERATION OF ISSUES AND FINDINGS.

3.1 In the facts and circumstances of the case and taking into account the replies / letters received from Padmini and its whole time directors, the following issues are framed for consideration.

a) whether the request of Padmini and its whole time directors to cross examine the persons from whom the statements had been taken by SEBI should be allowed ?

b) whether Padmini and its whole time directors had committed irregularities as mentioned in the show cause notice of SEBI dated February 20, 2004?.

3.2 At the outset, I would like to examine the request made by the learned senior advocate on behalf of Padmini and its whole time directors to cross examine those persons whose statements had been taken by SEBI. The present proceedings against Padmini and its whole time directors are initiated under Section 11B of the Act and under the provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 2003 (hereinafter referred to as the 2003 Regulations). Section 11B of the Act is quoted below for the sake of convenience:

Section 11B of the Act:

Power to issue directions.

11B. Save as otherwise provided in section 11, if after making or causing to be made an inquiry, the Board is satisfied that it is necessary,-

(i) in the interest of investors, or orderly development of securities market; or

(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or

(iii) to secure the proper management of any such intermediary or person, it may issue such directions,-

(a) to any person or class of persons referred to in section 12, or associated with the securities market; or

(b) to any company in respect of matters specified in section 11A, as may be appropriate in the interests of investors in securities and the securities market

Section 11B of the Act uses the word 'inquiry'. It does not specifically mention about the detailed procedure to be followed while passing a direction, thereof. Further, the provisions of the Act do not provide for an opportunity to cross examine the persons from whom the statements have been taken by SEBI during the course of investigation or otherwise. However, generally, a direction/order under Section 11B of the Act is passed against an entity/person, after providing the following opportunities, in compliance of the principles of natural justice:

(a) Notice in which the charges/allegations leveled against are specified

and

(b) An opportunity to submit his case.

However, in grave and emergent situations wherein ex-parte interim orders are passed in the interest of investors in securities market a post decisional hearing pending investigation/enquiry is granted for the purpose of either confirmation or revocation of the ex parte order. Thereafter, a regular show cause notice with charges/allegations is issued after investigation /enquiry.

3.3 Further, in terms of regulation 10 of the 2003 Regulations, SEBI is empowered to issue directions after giving an opportunity of hearing to the person concerned. The relevant extracts of regulation 10 of the 2003 Regulation is quoted below:

The Board may, after consideration of the report referred to in regulation 9, if satisfied that there is a violations of these regulations and after giving a reasonable opportunity of hearing to the persons concerned, issue such directions or take such actions as mentioned in regulation 11 and regulation 12.

3.4 Therefore, on a plain reading of section 11B of the Act and regulation 10 of the 2003 regulations as stated above, it can be seen that SEBI is empowered to pass directions as mentioned therein after giving a reasonable opportunity of hearing. However, how far this 'reasonable opportunity of hearing' can be extended is a matter of fact and depends upon the facts and circumstances of each case.

3.5 Therefore, proceeding on the basis that the powers under Section 11B are to be exercised in accordance with the principles of natural justice, the contention of Padmini and its whole time directors have to be examined as to what will be the scope and ambit of principles of natural justice in exercise of powers under Section 11B of the Act and as to whether the opportunity of cross-examination would be the very core of the principles of natural justice with an universal application or a case specific adjunct. The provisions of the Act and the Regulations as mentioned above do not recognize the concept of cross examination of the persons from whom the statements have been taken by SEBI, during the course of investigation or otherwise. Generally, the show cause notice and the reply received to the said show cause can be considered as the sufficient compliance of natural justice. It is a settled principle that the technical rules of evidence and pleadings are not a part of the audi alteram partem rule and the principles of 'natural justice' can not be fit into a straight jacket formula. The Hon'ble Supreme Court in the matter of Union of India v. Anand Kumar Pandey , had inter alia observed that "This Court has repeatedly held that the rules of natural justice cannot be put in a strait-jacket. Applicability of these rules depends upon the facts and circumstances relating to each particular given situation". Therefore, the requirements of natural justice depends on the circumstances of the case, the nature of the inquiry, the rules under which the concerned authority is acting, the subject matter that is being dealt with, etc. Hence, it has a variable content, and is not an inflexible rule having a fixed or rigid connotation.

3.6 Generally, the question whether an opportunity of cross examination is to be given or not, depends upon the circumstances of each case and the statute under which the hearing is being held. SEBI in its show cause notices mentioned above explained in detail the allegations leveled against Padmini and its whole time directors and further provided them an opportunity to submit their reply. Alongwith the said show cause notices, necessary explanations/materials substantiating the charges were provided to them in the form of annexures. However, Padmini and its whole time directors had initially sought for the inspection of various documents vide their letters as mentioned in para 2.3 and 2.4 above. It can be seen that though most of the documents / details sought by them were not required in the context of filing a reply to the said show cause notices, they had also sought for the copies of various documents. The said requests made by them were allowed by SEBI and the said opportunity was availed by Padmini and its whole time directors.

3.7 Subsequently, vide letters dated August 13, 2004, Padmini and its whole time directors requested SEBI to provide copies of various documents as mentioned in para 2.6 above. Taking into account the requests made by Padmini and its whole time directors, SEBI vide letter dated September 27, 2004 forwarded the copies of various documents as requested by them (para 2.7). I note that Padmini vide letter dated October 20, 2004 requested for certain documents as mentioned therein (para 2.8). In the said letter it was specifically stated that "...in the absence of vital documents such as those referred to above, we are not in a position to prepare a proper rely to the show cause notice and the send the same to SEBI". This categorical statement made by Padmini would lead to a conclusion that all the documents required for the purpose of replying the show cause notice issued by SEBI were received by Padmini except those mentioned in the above letter dated October 20, 2004. It is to be mentioned that Padmini, vide its above letter, sought for documents mentioned at serial nos. 1 to 7 therein.

3.8 On a perusal of the said request, it is noticed that documents at Sr. No. 1 to 3 were correspondences pertaining to SBI Mutual Fund and 4 to 7 were with respect to KP entities. Coming to the relevancy of the said documents sought by Padmini, it is to be mentioned that the said documents were not specifically referred to by SEBI in its aforesaid show cause notice. Triumph International Finance Ltd. had acquired 24 lakh shares in an off market deal from the following entities on February 18, 2000 as mentioned below:

Shares acquired from

Quantity

Rate (Rs.)

Amount (Rs.)

Cama Enterprises P Ltd.

2,00,000

162.75

3,25,50,000

Cherry Marketing P Ltd.

2,00,000

162.75

3,25,50,000

HT Ferro P Ltd.

3,00,000

162.75

4,88,25,000

Zinga Chemical P Ltd.

3,00,000

162.75

4,88,25,000

Iris Infrastructurals P Ltd.

7,00,000

162.75

11,39,25,000

Mikona Impex & Traders P Ltd.

7,00,000

162.65

11,38,55,000

Total

24,00,000

39,05,30,000

I note that out of the said 24 lakh shares 22 lakh shares were sold in off market deal by Triumph International Finance Ltd. to SBI Mutual Fund on February 21, 2000. Total purchase by SBI Mutual Fund amounted to 34,47,500 shares of Padmini including 22,00,000 shares acquired through Triumph. Comparison of the distinctive numbers of the total shares acquired by the Fund with that of the distinctive numbers of shares allotted to preferential allottees reveals that 23,64,900 shares acquired by the Fund had same distinctive numbers as that originally allotted to preferential allottees. Out of the said 23,64,900 shares, the break-up of transferors for 22,11,100 shares is as under:

Transferors of shares

acquired by SBIMF

Number of shares transferred

Cama Enterprises P Ltd.

1,99,500

Cherry Marketing P Ltd.

1,76,900

HT Ferro P Ltd.

3,00,000

Zinga Chemical P Ltd.

2,21,100

Iris Infrastructurals P Ltd.

6,07,100

Mikona Impex & Traders P Ltd.

7,06,500

Total

22,11,100

The details of above transactions were already sent to Padmini by SEBI, vide letter dated September 27, 2004 and therefore, Padmini can not take a plea that no documents were given to it. In the facts and circumstances, I find that all the documents/information germane to the present proceedings was furnished to Padmini and its whole time directors by SEBI. As already observed by me earlier, the successive requests of Padmini for additional information/ data were part of a design to delay the proceedings while traversing beyond the scope of show cause notice.

3.9 I further note that, SEBI vide letter dated August 29, 2005 explained in detail, the relevance of the documents and submissions which were relied upon by SEBI in support of its charge mentioned in the show cause notice (in respect of issue c). I would like to quote the relevant portion of the above letter for the sake of reference:

In this regard, we have prepared a table at Annexure 1, which provides in detail the documents relied in support of every charge mentioned in SCN issued to you. While, most of these documents were already provided to you earlier (as indicated in the Annexure), rest of these are now enclosed. Another table at Annexure 2 highlights the important submissions made by persons whose statements were relied by SEBI for issuance of SCN. As shown in this table, we are making out the charges not only on the basis of statements but also independent documentary evidences. These documents are referred in Annexure 1.

3.10 In Annexure I to the above letter, SEBI had specifically spelt out in detail, the charges, contentions made against Padmini and its whole time directors in the show cause notice, documents relied and also whether the statement of the parties were used as evidence etc. In the said annexure it was explained (in respect of the contention of the sale of shares to SBI Mutual Fund) that SEBI had relied upon the information provided by SBI Mutual Fund, the copy of the letter of Triumph (KP entities) and the copies of Form 32 of certain entities. In so far as the nexus between KP entities and the promoters of Padmini SEBI had relied upon copy of the debit notes issued by Delhi based allottees, copy of bank statement of KP entities and Delhi based allottees and the letter sent by one of the entities to KP entity.

3.11 Therefore, it is fairly established that all the documents relied upon by SEBI and relevant for present proceedings had been provided to Padmini and its whole time directors. Therefore, no prejudice has been caused either to Padmini and its whole time directors. No documents are considered by SEBI without giving a copy of the same to Padmini & its whole time directors. Though the copy of investigation report was not provided, the extracts of the investigation report relating to Padmini and its whole time directors for the purpose of these proceedings were communicated to them by way of show cause notices dated July 2, 2002 and February 20, 2004. Further, documents/ information which were issued by Padmini or expected to be in possession of Padmini/ its directors were also not provided.

3.12 Therefore, it can be seen that the information and documents which were gathered by SEBI during the course of investigation were provided to Padmini and its whole time directors. They had given their explanation against the said show cause notice and none had disputed the veracity of third party statements which were recorded by SEBI. They had also not disputed the bank entries of the allottees (in respect of the preferential allotment.) In the absence of any rebuttal to the statements made by the persons or the entries made in the official documents the request for cross examination cannot pass muster. Further, cross examination will not be part of the natural justice in view of the existence of documentary evidence to prove the charges otherwise, while the statements were merely of corroborative value. In this context, I would like to note that, one of the charges against Padmini and its whole time directors was that they had committed irregularities while allotting shares on preferential basis. One of the irregularities was that it had allotted shares to Koltata based and Delhi based allottees without the receipt of application / allotment money from them. The fact that the preferential shares were issued for cash may be valid as an observation, but non receipt of cash in most of the accounts before listing is incontrovertible.

3.13 The question whether Padmini had received the cash from the Kolkata and Delhi based allottees can be ascertained from the bank statement of Padmini or even from the allottees to whom the preferential shares were allotted. Admittedly, it is the case of Padmini that it had not received cash at the time of the allotment but received cheques from the aforesaid allottees. However, the said cheques were not presented for encashment immediately as per the requests of the said allottees which is only a cover-up for channelising the sale proceeds at a latter date as per the modus operandi established by investigation. Shri Vivek Nagpal in his reply had inter alia stated that "However, after receipt of cheques for allotment of shares, the allottees requested for withholding the cheques for presentation on some grounds. Having made the allotment, the company was left with no other option but to consider their request for delayed presentation, particularly when the market price of the share was ruling below par. In the said compelling circumstances, company was left with little choice but to hold on to the cheques as desired/ requested by the allottees". I also note that the application /allotment, pursuant to a colourable device as established by investigation money from the majority of the Kolkata and Delhi based entities were received much after the aforesaid allotment, pursuant to a colourable device as established by investigation.

3.14 Further, the requirement of granting cross - examination depends on the facts of the case, and is not an absolute right, particularly in strict liability offences. However, whatever standard is adopted, one essential requirement in terms of the principles of natural justice is that the person concerned should have a reasonable opportunity of presenting his case. This is based on the basic concept of "fair play" in actions pertaining to administrative, judicial or quasi judicial. As aforesaid, the basic concept of "fair play" depends upon the specifics of a particular case. In this context, the decision of the Hon'ble Supreme Court in the matter of State of Kerala v. K T Shaduli is relevant. The Hon'ble Supreme Court had interalia observed that "...It is, therefore, not possible to say that in every case the rule of audi alterem partem requires that a particular specified procedure to be followed. It may be that in a given case the rule of audi alterem partem may import a requirement that witnesses whose statements are sought to be relied upon by the authority holding the inquiry should be permitted to be cross-examined by the party affected while in some other case it may not. The procedure required to be adopted for giving an opportunity to a person to be heard must necessarily depend on the facts and circumstances of each case".

3.15 The learned senior advocate on behalf of Padmini and its whole time directors had placed reliance on the following judgments in reference to the issue of cross examination:

a) Kishinchand Chellaram v. CIT .

b) State of Kerala v. K.T. Shaduli

3.16 I have considered the above case laws cited by the senior advocate. In the first case, the issue for consideration was that whether there was any material evidence to fortify the finding that a sum of Rs.1,07,350 was remitted by the assessee and that it represented the undisclosed income. In the said case there was a dispute in respect of the facts and the concerned authority had failed to prove the fact that the undisclosed income was remitted by the assessee. Further some of the documents (letters written by the authorities to the Bank) were not brought on record. It was observed in the said judgment that "The primary evidence before the Tribunal in regard to the remittance of the amount of Rs. 1,07,350 was the application signed by Tilokchand and this application clearly showed that it was Tilokchand and not the assessee which remitted the amount of Rs.1,07,350 from Madras. There can be no doubt that the amount had been remitted by Tilokchand on behalf of the assessee and would have signed the application on behalf the assessee and not in his own name. We fail to appreciate how, in the face of this primary evidence showing Tilokchand as the person who remitted the amount of Rs.1,0,350, the Tribunal could possibly accept the unsupported statement of the manager of the bank, based on hearsay, that the amount was remitted by the assessee." In the said case there was no material evidence to justify that the amount remitted was undisclosed income whereas in the present case, the bank documents (accounts of Padmini) shows that it had not realized the cheques received from the Kolkata and Delhi based allottees before the allotment. Therefore, the principle laid down in the above case is not applicable. Further, the case does not proceed on any ipse dixit, but on well - documents, facts as assist the case cited wherein the undisclosed income was brought to tax on the basis of a statement of the manager of the bank.

3.17 In the second case relied upon by the senior advocate, the relevant Act was the Kerala General Sales Tax Act, 1963. In the said Act, as noted by the Hon'ble Supreme Court, there was a provision which empower the concerned person to prove the correctness or completeness of the return. The issue was that reliance was placed on the books of accounts of a third party while assessing the tax. The facts of the said case are entirely different from the present case. The said provision was already quoted by the Hon'ble Court in the said order at para 4 at page 1630 and the same is reproduced below for the purpose of brevity.

...Provided that before taking action under this sub - section the dealer shall be given a reasonable opportunity of being heard and where a return has been submitted, to prove the correctness or completeness of such return" The said judgment was passed in the context of the existing provisions of law empowering the party to prove the correctness or completeness of the document. However, in the context of the present case it has to be noted that such similar provisions are not recognized either explicitly or implicitly in the Act. In any event, the case is not on all flows with the case as above.

3.18 Further, in order to establish that cross examination is necessary, the party (whoever pleads) has to make out a case for the same. Merely stating that the statement of a person is being utilized for the purpose of adjudication would not be sufficient in all cases. When no prejudice is caused to the person concerned, denial of cross examination will not vitiate the entire proceedings. It has to be proved, by the said denial that, the party was prejudiced. If the entity is able to controvert or effectively present its case based on the material made available to it as well as the facts and circumstances of the case, then mere denial of right to cross examination shall not vitiate the proceedings. In this context, I note that Shri. Vivek Nagpal replied upon all the charges mentioned in the show cause notice. Further, Padmini vide letter dated October 20, 2004 had asked for certain documents which were not referred to in the show cause notice. In the present case, one of the prime allegations leveled against Padmini and its directors was that Padmini had allotted preferential shares to various persons / entities without the actual receipt of cash. The said fact has not been disputed by Padmini and its directors. Further, the said non receipt can be ascertained from the bank statements of Padmini or the allottees. Not only the said non receipt, Padmini and its whole time directors have not disputed the factum of presentation made to the kolkata based allottees in Taj, Kolkata, delay in transfer of shares, delay in demat of shares etc. In this regard, I would like to note the judgment of the Hon'ble Supreme Court in the matter of K.L. Tripathi v. State Bank of India , wherein it was interalia observed that "when on the question of facts there was no dispute, no real prejudice has been caused to a party aggrieved by an order, by absence of any formal opportunity of cross examination per se does not invalidate or vitiate the decision arrived at fairly". Whenever there is no dispute as to the existence of a particular fact a party against whom proceedings are taken cannot seek for the cross examination of persons.

3.19 Following the principle laid down by the Hon'ble Supreme Court in the above case, the Hon'ble High Court of Gujarat in the matter of Hindustan Finstcok Ltd. v. SEBI vide its order dated May 06, 2002 had inter alia observed that " If the credibility of a person who has testified or given some information is in doubt, or if the version or the statement of the person who has testified is in dispute, right of cross-examination must inevitably form part of fair play in action, but where there is no lis regarding the facts but certain explanation of the circumstances, there is no requirement of cross-examination to be fulfilled to justify fair play in action. When on the question of facts there was no dispute, that no real prejudice has been caused to a party aggrieved by an order, by absence of any formal opportunity of cross-examination per se does not invalidate or vitiate the decision aggrieved at fair play". It was also observed by the Hon'ble Court that " In the facts and circumstances of the present case, however, no case is made out by the petitioner from the averments made in the petition as well as from the proceedings of the appellate authority or before the first authority namely the S.E.B.I. that on account of denial of cross-examination any prejudice is caused to the petitioner". In the present case also, Padmini and its whole time directors have not made out a case to the effect that they were prejudiced by denying cross examination.

3.20 I further note that, Padmini and its directors have not explained as to why they require cross examination of various people when the factum of the non receipt of cash for the preferential allotment made in the year 1999 was borne out in the bank statements of the company (Padmini) and the allottees. In this context, I would like to refer to the judgment of the Hon'ble Supreme Court in the matter of Transmission Corporation of A.P. Ltd. and Ors. v. Sri Rama Krishna Rice Mill (decided on February 20, 2006). It was held "In order to establish that the cross examination is necessary, the consumer has to make out a case for the same. Merely stating that the statement of an officer is being utilized for the purpose of adjudication would not be sufficient in all cases....As has been rightly noted by the High Court in the impugned judgment where the reliance is only on accounts prepared by a person, cross examination is not necessary. But where it is based on reports alleging tampering or pilferage, the fact -situation may be different....The applications for cross-examination are not to be filed in routine manner and equally also not to be disposed of by adjudicator in casual or routine manner. There has to be application of mind by him. Similarly, as noted above, the consumer has to show as to why cross examination is necessary".

3.21 When the present case is examined in the context of the above judgments. I note that one of the main allegations leveled against Padmini was that it had allotted preferential shares to various persons / entities as mentioned in the preceding paras without the actual receipt of price. The consideration for the said allotment was received by Padmini after the said shares were sold by the allottees to third parties through off market transactions. Padmini has not denied the fact that it had not received the cash at the time of allotment.

3.22 The claim of Padmini was that it had received cheques from the allottees and the said cheques were not presented at that time upon the request by the allottees. The said cheques were presented for encashment by Padmini after the allottees received cash subsequent to the sale of the said shares to KP entities. I note that in terms of the provisions of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000, the issue of shares on a preferential basis has to be made at a price which is calculated as per the method specified therein. The facts of the instant case as above clearly establish a marked departure from normal commercial practice where cheques are presented for encashment immediately, as any prudent business man would do. On the contrary holding the encashment in abeyance till the sale proceeds are received from KP entities into the accounts of Delhi/ Kolkata allottees and revalidating the original cheques in August 1999 to December 1999/ January 2000 are very unusual features indicating a close nexus between Padmini, the allottees and KP entities in the course of well orchestrated plan of action. When the transaction, as established above, is vitiated by fraud and collusion, it will not be open to the party to claim the benefit of a normal business transactions and the accounting practice followed therein.

3.23 Neither Padmini nor its directors have rebutted the contents in the statements made by various people. Without citing any reasons and without showing the prejudice caused to them, they had simply sought for cross examination of the aforesaid people. Even otherwise the fact that Padmini had not received the cash at the time of the preferential allotment was borne out of the banks statements of Padmini and the allottees. I also note that Padmini furnished its reply to the show cause notice dated February 20, 2004. Therefore, I note that no prejudice has been caused to Padmini in the absence of cross examination. Further in his entire reply he had categorically sought for the cross examination of Shri. Sanjay Kumar except making a vague request that "It is submitted that this is only a part reply and I take the liberty to modify and add additional grounds in my reply on your making available to me...all the material relied on by the Investigating Officer and also after all allowing the cross examination by me of all the persons, whose statements have been relied upon by you in the Show Cause Notice"....

3.24 I further not that Padmini and Shri Vivek Nagpal had not cooperated with SEBI during the investigation proceedings and thereby SEBI had initiated adjudication proceedings against them. Though the orders (monetary penalty of Rs. 5 lakhs and Rs.3 lakhs respectively) passed by the Adjudicating Officer was challenged by Padmini and Shri Vivek Nagpal before the Hon'ble Securities Appellate Tribunal (SAT). The SAT in its order dated June 28, 2005 had inter alia observe that

5. When a serious case of alleged fraud with respect to allotment of preferential shares has taken place, it is the duty of the respondent to get to the information that is necessary and the appellant did not cooperate with the respondent by not responding to the show cause notice primarily.

6. Legal semantics cannot be an answer for genuine investigation with respect to alleged fraud since the preamble of the SEBI Act clearly states that the primary duty of SEBI is to protect the interest of investor in securities and to regulate the securities market and for matter connected with or incidental thereto.

7. The adjudicating officer was fully justified in holding that the appellant did not cooperate with the adjudicating officer in furnishing information. It appears to us that the appellant took an intransigent attitude in the matter of furnishing information and the non-compliance of the appellant to the summons issued to him is far violation of Section 15A of the SEBI Act.

8. In these circumstances, we have no hesitation in confirming the order passed by the adjudicating officer.

3.25 The SAT while dismissing the appeal filed by them, modified the order of the Adjudicating Officer in respect of the quantum of penalty. It is not open to a person who had not co operated with the authority to allege that the authority has violated the principles of natural justice, when he is solely responsible for the impasse he has created and when the entire legal tangle is his own making, to frustrate investigation and to derail the quasi judicial procedure through a labyrinth of legal cavils with an air of injured innocence. Further In the facts and circumstances of the case, I do not consider this as fit case to allow the request of Padmini and its directors for cross examination. Since factual position (including the presentation made by Padmini in Kolkata, non receipt of application/allotment money from the Delhi based and Kolkata based allottees, delay in transfer of shares, delay in demat etc.) are not disputed by Padmini and since, on a conspectus of the Judgments cited supra, it is established that Padmini and its whole time directors have not been prejudiced in the absence of right of cross examination, I am of the considered view that the request for cross examination of the persons is not tenable and the same is liable to be rejected. In my view the present case is otherwise conclusively established by documents alone. Further, SAT in the matter of Jimmy Jal Gazdar v. SEBI, vide order dated June 12, 2006 had observed that " The appellant should plead its case before the Board on merits as well and let a final order be passed. In case the said order goes against the appellant, it would be open to him to challenge the same on all grounds available to him in accordance with law including the one that the Board did not have the jurisdiction to initiate the proceedings. We are taking this view in the facts and circumstances of the case because we are of the opinion that all the disputes between the parties should be comprehensively decided by the Board and that they should not be allowed to have them adjudicated piecemeal".

3.26 In respect of the second issue with reference to the show cause notice dated February 20, 2004, I note that various allegations have been levelled against Padmini and its whole time directors. One of the allegations was that it had allotted preferential shares to Kolkata and Delhi based allottees without the actual receipt of cash. At the outset, it is to be mentioned that Padmini has not disputed the fact that the preferential shares were issued against cash and that shares were allotted to the Kolkata and Delhi based allottees. Admittedly, Padmini had not received the cash from majority of the allottees before the said preferential allotment of shares. Shri Vivek Nagpal in his reply had stated that after the receipt of the cheques, the allottees had requested for withholding the said cheques for presentation on some or the other grounds.

3.27 However, I note that Shri Vivek Nagpal had given a certificate dated June 30, 1999 stating that Padmini had already received the share money in respect of the preferential allotment. The extracts of the said certificate are mentioned below:

This is to certify that the Company had already received Rs.8,52,50,000/- Share money in respect of Preferential Issue of 2,00,00,000 new Equity Shares of Rs.10/- per share aggregating Rs. 20,00,00,000/-, as per details given below:

Number of shares

Amount (Rs.)- per share

Total Amount (Rs.)

47,00,000

10.00

4,70,00,000/-

1,53,00,000

2.50

3,82,50,000/-

3.28 In addition to the above certifiacte regarding the receipt of the share money, Shri Vivek Nagpal had also given a certificate dated September 17, 1999 to the effect that Padmini had complied with all the legal and statutory formalities as mentioned under SEBI guidelines for preferential issue dated August 4, 1994. Further, Shri Vivek Nagpal vide letter dated December 06, 1999 certified that a sum of rupees 9.2 crores had been received by Padmini and that the cheques received against the said issue had been deposited and duly credited to its account with the following banks:

Names of the Bank

Branch

Amount deposited

State Bank of Hyderabad

Park Street, Calcutta

40500000

ICICI Bank *

Nariman Point Mumbai

2,00,00,000

Punjab National Bank

Okhla Industrial Estate, New Delhi

18000000

Vijaya Bank

Ansari Road, New Delhi

13500000

Total

92000000

*pertaining to the receipt from UTI with respect to the preferential allotment.

3.29 I also note that the statutory auditor of Padmini, Shri Kailash Chandra Agrawal had also issued various certificate as per the details mentioned below. Certificate dated June 30, 1999 certifying that Padmini had already received Rs.8,52,50,000/- share money in respect of the above preferential allotment. The extracts of the said certificate are mentioned below:

... On the basis of our verification, we certify that the Company had already received Rs.8,52,50,000/- Share money in respect of Preferential Issue of 2,00,00,000 new Equity Shares of Rs.10/- per share aggregating Rs. 20,00,00,000/-, as per details given below:

Number of shares

Amount (Rs.)- per share

Total Amount (Rs.)

47,00,000

10.00

4,70,00,000/-

1,53,00,000

2.50

3,82,50,000/-

3.30 Shri Kailash Chandra Agrawal had also issued a due diligence certificate dated June 30, 1999, certifying that all legal requirements connected with the said preferential allotment had been duly complied with and the disclosures made are true, fair and adequate. The extracts of the said due diligence certificate are mentioned below:

DUE DILIGENCE CERTIFIACTE

Re: Padmini Polymers Limited

Preferential Allotment of 2,00,00,000 Equity Shares of Rs. 10/- each aggregating to Rs. 20,00,00,000/-.

i) We have examined various documents and materials facts/papers in connection with the Preferential Allotment.

ii) On the basis of such examination and discussion with the Company, its Directors and other Officers, Other Agencies, independent verification of the statements concerning the objects of the Preferential Allotment, Price justification and the contents of other Documents and papers furnished by the Company.

We confirm that:

(a) The Preferential Allotment of Shares is in conformity with the documents/materials and papers relevant to the Preferential Allotment.

(b) All legal requirements connected with said Allotment as also the guidelines and instructions etc. issued by SEBI, the Government and any other competent authority in this behalf have been duly complied with.

3.31 Shri Kailash Chandra Agrawal had also issued a certificate dated November 30, 1999 certifying the receipt of share application money. The said certificate signed by Shri Kailash Chandra Agrawal is reproduced d below:

TO WHOMSOEVER IT MAY CONCERN

This is to certify the detail of receipt of Share Application Money aggregating to Rs. 8,52,50,000/- realised & credited to the account of M/s Padmini Polymers Limited is given as under:

SL. No.

NAME OF ALLOTIES

CHQ.NO.

CHQ.DT

DRA WN ON

AMOUNT

Contessa Commercial Co Pvt. Ltd.

175826

21.05.99

State Bank of Hyderabad

90,00,000.00

Bhumenfeld Ltd.

307471

17.05.99

State Bank of Bikaner and Jaipur

90,00,000.00

Jiwansagar Promoters Pvt. Ltd.

671542

07.06.99

State Bank of Hyderabad

22,50,000.00

Bhagwandas Sagarmal

155361

28.05.99

State Bank of Hyderabad

22,50,000.00

Cherry Marketing P. Ltd.

43662.

01.06.99

Vijaya Bank

22.50,000.00

Alok Khelan

149653

25.05.99

HDFC Bank

22 50.000.00

J P Promoters P. Lld

780801

21.05.99

Canara Bank

90,00,000. 00

Hermonite SurgicaJs P Ltd.

19870

03.06.99

Vijava Bank

22.50,000.00

Royal Bengal Exports P. Ltd.

750970

03.05.99,

The Federal Bank Ltd.

22,50,000.00

Prakash Kumar Damani (HUF)

612294

01.06.99

Vijava Bank

22.50.000.00

Carna Enterprises P. Lid.

43565

01.06.99

Vijava Bank

22,50,000.00

Raj Kumar Kishorcpuria

931394

01.06.9

State Bank of Hyderabad

22,50,000.00

Zinga Chemicals Pvt. Ltd.

22985

02.06.99

Vijaya Bank

22,50,000.00

Hennonile Consullanls P LId

42454

02.06.99

Vijaya Bank

22.50.000.00

Savara Tic-up Pvt. Ltd.

739153

03.06.99

The Federal Bank Ltd.

22,50,000.00

HT Ferro P Ltd.

596160

03.06.99

Bank of Baroda

22,50,000.00

Pramod Kumar Kishorcpuna

915595

25.05.99

State Bank of

22,50,000.00

Prakash Kumar Damani

92047

01.06.99

Vijaya Bank

22.50,000.00

VB Impex P. Ltd.

651401

21.05.99

Vi java Bank

22.50,000.00

S. Benwal

413113

28.05.99

Union Bank of

22,50,000.00

Unit Trust of India

445867

25.05.99

UTI Bank Ltd.

200.00.000,00

Total

8,52,50,000

3.32 However, contrary to the above certificates, as a matter of fact Padmini had received the cash from the Kolkata and Delhi based allottees much after the allotment of preferential shares. It is also observed that cheque no. 307471 dated May 17, 1999 of Blumenfield (towards the application/ allotment money) was revalidated to January 04, 2000 by the said entity The payments towards the preferential allotment is can be established from the bank statements of Padmini. The details of the credits received into the bank account of Padmini from the aforesaid allottees in respect of the preferential allotment are mentioned below:

a) Kolkata Based allottees (revealed from the bank account of Padmini maintained in State Bank of Hyderabad, Kolkata)

Name of Allottees

No. of Shares

Allotted

(on 20.6.99)

Amount due to Padmini (Rs.)

Cheque

Date

Clg.

Date

Contessa Commercial

9,00,000

90 lacs

21.5.99

5.1.00

Bllumenfeld

9,00,000

90 lacs

17.5.99

6.1.00

Jeevan Sagar

9,00,000

22.50 lacs

7.6.99

19.1.00

Bhagwan Das Sagarmal

9,00,000

22.50 lacs

28.5.99

14.1.00

Raj Kumar Kishorepuria

9,00,000

22.50 lacs

1.6.99

14.1.00

Pramod Kumar Kishorepuria

9.00.000

22.50 lacs

22.5.99

18.1.00

Alok Khetan

9,00,000

22.50 lacs

28.5.99

19.1.00

Royal Bengal Exports

9,00,000

22.50 lacs

3.6.99

18.1.00

Savera Tieup

9,00,000

22.50 lacs

3.6.99

16.3.00

Sanjeev Beriwal

9,00,000

22.50 lacs

28.5.99

18.1.00

Prakash Kumar Damani

9,00,000

22.50 lacs

25.6.99

14.3.00

Prakash Kumar Damani(HUF)

9,00,000

22.50 lacs

25.6.99

14.3.00

I note from the above bank details that the cheques of the above allottees were realised and credited into the bank account of Padmini long after the allotment and even after the listing approval given by DSE (December 23, 1999)

b) Delhi Based allottees: (revealed from the bank account of Padmini maintained in Vijaya Bank,Ansari Road Branch, New Delhi)

Name of Allottees

Allotted

On 20.6.99

Amount due to Padmini (Rs.)

Cheque

Date

Clearing

Date

Cherry Marketing P Ltd.

9,00,000

22.50 lacs

1.8.99

27.12.99

Hermonite Surgicals P Ltd

9,00,000

22.50 lacs

3.8.99

27.12.99

Zinga Chemicals P Ltd.

9,00,000

22.50 lacs

2.8.99

27.12.99

Hermonite Consultants P Ltd.

9.00,000

22.50 lacs

2.8.99

27.12.99

HT Ferro P Ltd.

9,00,000

22.50 lacs

3.8.99

28.12.99

Cama Enterprises P Ltd.

9,00,000

22.50 lacs

1.8.99

27.12.99

M/s VB Impex P Ltd.

9,00,000

90 lacs

21.5.99

11.10.99

M/s JP Promoters P Ltd.

9,00,000

90 lacs

21.5.99

7.3.00

3.33 I note from the bank statements of Padmini (maintained with Vijaya Bank, Ansari Road Branch, New Delhi) that the cheques of Cama Enterprises (cheques no. 43565), Hermonite Consultants Pvt. Ltd. (cheques no. 42454), Zinga Chemicals Pvt. Ltd. (22985), Cherry Marketing Pvt. Ltd. (cheques no. 43226), Hermonite Surgicals Pvt. Ltd.(cheques no. 19878) and H T Ferro Pvt. Ltd. (cheques no. 596160) were cleared only on December 27, 1999 except the cheques of H T Ferro Pvt. Ltd. which was cleared on December 28, 1999. Similarly, from the bank statement of Padmini maintained with the State Bank of Hyderabad, Kolkata it is observed that the payments from the Kolkata based entities were received in the month of January 2000. Further, the return of allotment filed by Padmini (dated December 01, 1999) with the Registrar of Companies projecting that allotment was made against consideration received from various allottees was apparently false. Actually the consideration was received from the majority of the Delhi and Kolkata based allottees long after the said date. Therefore, inter alia the certificates given by Shri Vivek Nagpal were not only false but also misleading. The said certificates facilitated Padmini to obtain listing approval from DSE for the shares allotted on preferential basis.

3.34 I further observe that the nexus between the Kolkata based allottees and Padmini can be inferred from the reply of Shri Vivek Nagpal that "...it is further submitted that the company came to know about acting in concert by the above parties for the first time only on June 10, 1999 when Contessa Commercial Co. Pvt. Ltd. made a disclosure under Regulation 7 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to the company regarding their acting in concert with other companies. Contessa Commercial Co. Pvt. Ltd. had made a disclosure that it was acting in concert with Bllumenfiled Ltd. Jiwan Sagar Promoters Pvt. Ltd., Promod Kr. Kishorepuria, Raj Kumar Kishorepuria and Bhagawandas Sagarmal".

3.35 Despite the receipt of the said information, well in advance of the preferential allotment, Padmini had opted to allot preferential shares to the said allottees on June 20, 1999. Further, the Goenka Group companies (belonging to the category of Delhi based allottees) namely Cama Enterprises, Hermonite Consultants Pvt. Ltd., Zinga Chemicals Pvt. Ltd., Cherry Marketing Pvt. Ltd. Hermonite Surgicals Pvt. Ltd. and H T Ferro Pvt. Ltd. were managed by the common directors as mentioned below:

Name of Allottee company

Name of directors

Cherry Marketing P Ltd.

Shri Arun Goenka

Shri Umesh Goenka

Shri Ashok Sood

Hermonite Surgicals P Ltd

Shri Arun Goenka

Shri Umesh Goenka

Shri Shiv Prasad Agarwal

Zinga Chemicals P Ltd.

Shri Arun Goenka

Shri Umesh Goenka

Shri P. Ratna Rao

Hermonite Consultants P Ltd.

Shri Arun Goenka

Shri Umesh Goenka

Shri Himangshu Bhadra

HT Ferro P Ltd.

Shri Arun Goenka

Shri Umesh Goenka

Cama Enterprises P Ltd.

Shri Arun Goenka

Shri Umesh Goenka

Shri Ashok Sood

The above table will establish that the said allottees belonged to the same group. Similarly, VB Impex Pvt. Ltd. and M/s J P Promoters Pvt. Ltd. also belonged to the same group and the name of the directors of the said companies are mentioned below:

Name of allottee company

Name of directors

M/s VB Impex P Ltd.

Shri Vinod Kumar

Shri Vinay Bansal

M/s JP Promoters P Ltd.

Shri Anurag Gupta

Shri Pradeep Kumar

3.36 I note that the investigation conducted by SEBI revealed that Shri Vinod Kumar of VB Impex Ltd. and Shri Pradeep Kumar of JP Promoters P Ltd. have the same address as D-323, Nawada Housing Complex, Vipin Garden, New Delhi. These companies apparently belonged to the same group. This coupled with the fact Padmini had not received the cash before the allotment would establish without any doubt that there was a nexus between the Kolkata based allottees and Padmini. The preferential shares which were allotted to Kolkata based allottees were subsequently sold to KP entities through off market deals and were used for manipulating the market by KP entities.

3.36 The fact that Padmini had not received the cash for the preferential allotment is not disputed. Padmini and its directors placed reliance on the judgment of the Calcutta High Court to the effect that " once a cheque is encashed, the date of payment is the date of delivery of the cheques, the payment relating back to the date when the cheques is delivered". The facts of the said case and that of the present case are entirely different in the sense that though Padmini had received cheques from the Delhi and Kolkata allottees in the month of May 1999 the same were revalidated to January 2000, after the listing approval granted by DSE. Not only the cheques were realized after the listing approval but also Padmini and its statutory auditors had given various certificates to the effect that the same were credited and the money was in fact realized into the account of Padmini before the dates on which certificates were issued, which were found to be false. The Compliance of statutory obligation cannot be postponed so as to defeat its purpose. This is contrary to the normal commercial practice where cheques was presented for encashment on receipt. It may also be noted that there was a well established nexus between the allottees and the issuer (Padmini), as detailed above. By giving such certificates Padmini got its preferential shares listed at DSE and the preferential shares allotted to Kolkata and Delhi based allottees were manipulated by KP entities to the detriment of the genuine investors. Therefore it can be said that Padmini had committed fraud on the securities market by defrauding the genuine investors. Further, it is a case of collusive fraud to ensure that cheques are encashed after the sale proceeds were received.

3.37 Though Padmini had not received the cash in the preferential allotment it had filed a false certificate through its statutory auditors claiming that it had received the cash and thereby obtained the listing approval for trading of the said shares from DSE. The contention that Padmini was not a party to a contract so as to attract Regulations 6 (c) of the FUTP Regulations cannot be accepted. In this context, I note that Shri Vivek Nagpal in his reply had stated that the contract between Padmini and its allottee concluded on the allotment. If that be so, it had a duty to see that consideration (cash) for the said allotment was received at the time of allotment. It failed to do so. On the other hand it had opted to file false certificates to DSE and claimed the receipt of application / allotment money and DSE on the basis of the said certificates listing approval and the said shares were subsequently used for manipulation by the KP entities to the detriment of the genuine investors. Therefore in the entire facts and circumstances as discussed earlier, it cannot be believed that Padmini was not a party to such a contract. All these are valid arguments in a normal allotment process, but when the same is vitiated by collusion as established, such arguments cannot past muster.

3.38 Shri Vivek Nagpal has been contended that the applicable regulation in respect of the alleged violation is the provisions of FUTP Regulations and not 2003 Regulations. I note that Padmini and its whole time directors have been charged for violating the provisions of FUTP Regulations (95 Regulations) and not the provisions of 2003 Regulations. Only proceedings are continued under the provisions of 2003 Regulations for the violations of 1995 Regulations, as specified in regulation 13 of 2003 Regulations. The contention that it is not a party to contract for attracting regulation 2 (c) of the FUTP regulations is not tenable as it has been discussed in detail above that by aiding the allottees (by way of unusual financial accommodation), not only it had violated the provisions relating to preferential allotment but also it had become a party to the subsequent manipulation of the shares of Padmini made by the KP entities. Therefore it is fairly established that by issuing certificates which were found to be false Padmini and its whole time directors have committed the violations of the provisions of 6 (a) (d) of the FUTP Regulations.

3.39 The fact that Padmini had made a presentation at Hotel Taj Bengal, Kolkatta around March-April 1999 has not been disputed. The contention of Padmini that there was nothing illegal in conducting such presentation. I note that all the Kolkatta based allottees amongst others had appeared in the said presentation. Shri Sunil Kishorepuria represented the entities listed at sr. nos. 2 to 7 in Table 3 above. Padmini & its promoter namely Shri. Vivek Nagpal were known to Shri Sunil Kishorepuria since 1993-94, as he had business dealings with Padmini It appeared that Shri Sunil Kishorepuria had served as the main contact point for facilitating preferential allotments to other Kolkatta based allottees and that Padmini had agreed that the cheques of the allottees would be presented for collection only after obtaining their consent. It appears that the financial accommodation as above might have been mediated by Shri Sunil Kishorepuria to the Kolkatta based allottees and accordingly, preferential shares were allotted on June 20, 1999 to the said allottees without the actual receipt of consideration and the allotment letters were also issued to the allottees. The investigations conducted by SEBI further revealed that at the instance of the Kolkatta based allottees for exiting out of the allotment, one Shri Sanjay Kumar was deputed by the management of Padmini to Kolkatta based allottees. Shri. Sanjay Kumar, Chartered Accountant approached the allottees and offered to purchase allotments of all the allottees at their cost price. The said move is an indication of the fact that the Kolkata based allottees were used to channelise the transactions. That apart, the fact remains that the Kolkata based allottees ultimately sold to KP entities and paid back allotment money on realization of such sale proceeds and in that view, the role of Shri Sanjay Kumar is purely indicative, providing necessary insights into the whole colorable arrangement. In that perspective, when the case turns on established facts, there is no need to allow cross examination of Shri Sanjay Kumar. The fact that the application/allotment money was not received at the time of the allotment, especially when such allotment was made after knowing that the Kolkata based allottees were persons acting in concert will lead to the conclusion that the presentation was made for driving the entire game plan.

3.40 I note that there was nexus between Padmini and Goenka Group as 54 lacs shares were allotted on preferential basis to various companies forming part of Goenka group and that unusual financial accommodation was given by Padmini to Goenka group by way of late acceptance of cheques as mentioned in the preceding para. It was found that the companies belonging to Goenka Group did not have the required funds at the time of allotment. It was only after consideration was received from KP entities towards shares that payment was made to Padmini. I also note that Goenka Group also sold shares through M/s Triumph International, Member, NSE (KP entity) to SBI Mutual Fund, which had decided to acquire the shares in pursuance to a presentation made by Padmini. I also note that the director of VB Impex Pvt. Ltd. namely Shri Vinod Kumar and director of JP Promoters namely Shri Pradeep Kumar the same address as D-323, Nawada Housing Complex, Vipin Garden, New Delhi. I also note that the said companies apparently belonged to the same group and Shri Sanjay Kumar, Chartered Accountant was also associated with the said companies as he mediated and arranged payment from the said companies to various Kolkatta based allottees for acquisition of preferential allotment shares. In light of the allotment of shares on preferential basis, unusually generous financial accommodation extended by Padmini to the allottees with regard to payment against these shares; purchase of shares of some of the Kolkata based allottees by JP Promoters and payment to various Kolkata based allottees by VB Impex, it becomes evident that Padmini, its management and the VB Impex group entities were in league in crafting together the whole deal under the guise of preferential allotment wherein the beneficiaries turned out to be name - lenders beguiling the true purport of the transactions.

3.41 As per the Notice for the Annual General Meeting of Padmini held on March 24, 1999, the stated purpose of the preferential issue was to meet the urgent need for long term working capital. However, the manner in which the issue was gone about gives the lie to the purported objective, with the allotment ultimately landing up with KP entities for market manipulation. I also note that a large quantity of the said preferential shares (i.e. 72 lacs shares) reached Ketan Parekh entities (50 lacs shares were acquired by Classic Credits & Panther Fincap and 22 lacs shares were sold through Triumph International Finance to SBI Mutual Fund), will undoubtedly prove that the main objective of the irregular preferential allotment was to use substantial chunk of such shares later for market manipulation through KP entities. The transfer of shares of Padmini from the allottees to Classic Credits & Panther Fincap (KP entities) are mentioned below:

Name of the buying KP entity

Name of seller to KP entity

Date of purchase

Date of payment

No. of shares

Amount

(Rs. in crores)

Classic Credits

VB Impex

12.10.99

24.12.99

9,00,000

1.80

Classic Credits

JP Promoters

12.10.99

24.12.99

9,00,000

1.80

Classic Credits

Churuwala Exports

12.10.99

N.A.

7,00,000

1.40

Panther Fincap

Cama Enterprises

12.10.99

24.12.99

9,00,000

1.80

Panther Fincap

Cherry Marketing

12.10.99

28.12.99

9,00,000

1.80

Panther Fincap

Hermonite Consultants

12.10.99

24.12.99

7,00,000

1.40

Total

50,00,000

10.0

3.42 The shares purchased by KP entities as mentioned above were part of the shares allotted during the preferential allotment of Padmini. All the entities (except Churuwala Exports) were Delhi based preferential allottees. Apparently M/s VB Impex P Ltd., M/s JP Promoters P Ltd. and M/s Churuwala Exports P Ltd. were part of same group. It can also be seen that the said purchase of shares of Padmini were made before the said entities made the payment in respect of the said allotment. The said purchase was also made before the listing of the said shares. The other entities namely, M/s Cama Enterprises P Ltd., M/s Cherry Marketing P Ltd. and M/s Hermonite Consultants P Ltd. were part of Goenka Group. The acquisition of the shares from the above entities by KP entities on the same date i.e. October 12, 1999 indicate that both VB Impex Group (including M/s VB Impex P Ltd., M/s JP Promoters P Ltd. and M/s Churuwala Exports P Ltd., DKG Buildcon P Ltd., Iris Infrastructurals P Ltd. & Mikona Impex & Traders P Ltd.) and Goenka Group of allottees (including Cherry Marketing P Ltd., Hermonite Surgicals P Ltd., Zinga Chemicals P Ltd., Hermonite Consultants P Ltd., HT Ferro P Ltd. & Cama Enterprises P Ltd.) were apparently acting in concert in channelising the shares to KP entities. It will also establish that shares of Padmini (which were allotted on preferential basis) were sold to third parties without the actual receipt of money. It is worth mentioning here that most of the cheques given by the said allottees were revalidated to December 1999. It appears that Padmini did not take any precaution against such transfer to third party without the receipt of application / allotment money and such a conduct is clearly demonstrative of the true purport of preferential allotment which was masterminded by Padmini. Further, it is corroborated by bank statements of allottees that they did not have requisite funds at the time of issue of cheques for purchase of shares. As such the said entities had served as a temporary parking point and later as a conduit for channelising the shares of Padmini to KP entities.

3.42 I also note that none of VB Impex Group entity had any office infrastructure at the given addresses i.e. at (i) D-322-323, Nawada Housing Complex, Vipin Garden, New Delhi (ii) D-2, Bal Udyan Road, Uttam Nagar, New Delhi (iii) L-53, Bal Udyan Road, Uttam Nagar, New Delhi (iv) C-438, East Babbarpur, Chajjupur, Shahdara, Delhi (v) C-10, Vipin Garden, Kakroda Mod, Uttam Nagar, New Delhi (vi) 1/7184, Shivaji Market, Shahdara, Delhi besides the tell - tale concomitant that none of the directors or employees were available at these addresses. These entities/ their directors failed to appear before SEBI in response to summons for personal appearance.

3.43 From the above, it can be seen that all the allottees (who appear to be name lenders) were used by Padmini for the ultimate purpose of manipulating the market by allotting shares without the receipt of application / allotment money and by giving false certificate to the said effect. The period 1999-2000 was rife with dubious preferential allotments designed to manipulate the market. The one, the subject matter of the order, was no exception and the attendant trappings with all tell -tale suspicious features as detailed supra do not leave any room for doubt that it was a fraud on the market in collusion with the name lenders and KP entities in creating artificial volume/price for luring the unsuspecting investors. In terms of Regulation 6(a) of the FUTP Regulations no person shall knowingly engage in any act or practice which would operate as a fraud upon any person in connection with the purchase or sale of, or any other dealing in any securities. In this context, I note that the preferential shares of Padmini which were allotted to Kolkata and Delhi based allottees were subsequently transferred to the KP entities and were used for manipulating the market by KP entities by artificially creating volumes and price in the said shares. Further Regulation 6(d) of the FUTP Regulations prohibits a person from indulging in falsification of books, accounts and records. In the present matter, it is fairly established that Padmini had issued false certificates and thereby DSE had given its approval for the listing of the shares allotted by Padmini on preferential basis, inter alia on the basis of the said certificates. It was also found that the said shares were subsequently used for manipulating the securities market to the detriment of genuine investors. In the process genuine investors were defrauded.

3.44 In the above context, I note the observation of the SAT in the matter of Ketan Parekh v. SEBI that

When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer / seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged. This, in our view, clearly flows from the plain language of Regulation 4(a) of the Regulations.

3.45 I also note that there were media reports and investor complaints that conversion of physical stocks to Demat stocks had been delayed. I note that the dematerialisation of shares had deliberately not been done by Padmini promptly or in a sequential manner. The trading in the scrip of Padmini was shifted to the compulsory demat form w.e.f. August 28, 2000 in terms of SEBI circular dated May 29, 2000. There were various complaints and market reports of delay in transfer of shares and conversion of physical shares into demat form. It had been observed that most of the complainants lodged their shares with Padmini during the year 2000 (when the scrip went into compulsory demat). Instances of complaints where the shares were not transferred for a long time are given below:

Name of Complainant

Number of shares

Date of lodgment

Date of

Complaint

Montona Securities Ltd.

2,000

8.7.2000

19.2.2002

LC Todarwal & Co.

100

10.5.2000

19.9.2000

DV Jaithalia & Co.

1,000

7.7.2000

21.2.2001

Ram Shankar Pandaya

400

16.7.2000

24.3.2001

Arundhati Deb

300

8.12.1998

29.3.2001

Naresh D. Jain

5,000

25.5.2000

15.5.2001

Vandarkulali Muthiah

200

5.5.2000

15.6.2001

Bharat Hari Singhania

100

6.7.2000

28.6.2001

Amit M Shah

100

12.8.2000

28.7.2001

3.46 In terms of Section 113 of the Companies Act, 1956, the transfer of shares have to be effected within two months of the said request. I also note that in order to examine the impact of delay in transfer/ demat on the trading, details of transfers effected and physical shares dematerialized during the period May 1, 2000 to September 27, 2000 were also sought by SEBI for analysis and that an inspection of transfer/ demat records of Padmini was also undertaken by SEBI on August 2, 2001. During the inspection, Padmini avoided submission of share transfer records on the plea that its computer server was down. The findings relating to share transfer/ demat are discussed below:

a. It was observed from certain information furnished by Padmini that a large number of shares were shown as lodged for transfer on July 26, 2000 and transferred on the very next day i.e. July 27, 2000 and dispatched on September 5, 2000.

Having transferred the shares, there is no justification for retaining the shares for such a long time other than to reduce floating stock in the market. Incidentally this period of withholding shares for transfer coincides with the upward price movement in the scrip, which had obviously been accentuated by this act. I also note that Shri V. S. Gupta, Director (Finance) of Padmini in his statement recorded on February 9, 2002 stated that the company received unusually large volume of shares for transfer on July 26, 2000. The said transfers were approved by the transfer committee on July 27, 2000 and dispatched on September 5, 2000.

b. During the inspection, it was observed that no physical records were maintained by Padmini evidencing the date of lodgment or date of dispatch in respect of shares received for transfer or dematerialization. The explanation of Padmini that its computer records had been afflicted by virus does not appear to be plausible since it is inconceivable that Padmini would not have back up of such a critical share transfer/ demat records affecting investors interest.

c. Approximately 80 lacs shares constituting a significant quantum of the floating stock, were withheld by Padmini during August 2000 which impacted the scrip price and jeopardised the interests of investors. The first lot of shares lodged for dematerialization was received by the company on March 30, 2000 and dematerialised after almost 5 months on 26.8.2000. As on 28.8.2000, merely 7,53,700 shares were dematerialised i.e. 1.52% of capital. As per the data obtained from NSDL, merely 15,03,954 shares of Padmini for 65 shareholders were dematerialised as on September 1, 2000. It was explained by Shri V.S. Gupta that due to book closure and compulsory demat trading in the scrip, there was sudden spurt in requests for transfer. It was contended that Padmini had been regularly informing SEBI about progress of the Dematerialisation while attending to all investor grievances. However, the periodical reports on status of Dematerialisation submitted by Padmini to SEBI and DSE were found to be factually incorrect.

d. Transfer of shares and conversion of physical to Demat shares was not done in a sequential manner. There are several instances of transfers and Demat having been done out of turn. Instances were observed when shares were dematerialized within one day of lodgment. Some instances of out of turn dematerialisation to the detriment of other investors are shown below:

Instances of delay in demat

Name of Share holders

No. of Shares

Date of lodgment

Date of demat

Adani Finance Ltd.

14,00,000

24.8.2000

4.9.2000

Reliance Petroleum Ltd.

18,17,900

31.8.2000

21.9.2000

Panther Fincap

10,00,000

4.9.2000

5.9.2000

A. Jain & Co. P Ltd.

6,33,600

31.8.2000

21.9.2000

Luxor(India) P Ltd.

5,00,000

4.9.2000

22.9.2000

Classic Credits Ltd.

2,88,000

6.9.2000

15.9.2000

Reena Jain

1,42,100

4.9.2000

15.9.2000

Sushma Jain

74,400

4.9.2000

15.9.2000

Some of the above entities had also actively traded in the shares of Padmini and possibly benefited from the out of turn dematerialisation. When confronted with these figures, Shri V.S. Gupta, whole time director of Padmini stated that after the scrip went into compulsory demat mode, there was an acute shortage of deliveries and the shares attracted Ulta Badla at DSE. With a view to avoid payment crisis at the DSE, they were asked by DSE to effect out of turn/ expedite demat of certain large quantities of shares offered in Badla at DSE. However, the same does not satisfactorily explain the position. Information obtained from NSDL also shows that certain entities were favoured by out of turn dematerialisation, as shown below:

Instances of out of turn demat

Name of entity

As on 1.9.2000

As on 15.9.2000

As on 29.9.2000

Ketan Parekh Group

Panther Fincap

600

10,85,800

50,800

Classic Credits

1,25,800

3,14,000

16,500

R P & C International (FII)

1,45,000

Promoter

Vivek Nagpal

1,26,300

22,634

Anand Jain Group (of Reliance)

Silvasa Fibres P Ltd.

69,200

20,000

Ashok Agarwal Group

SMC Share Brokers Ltd.

2,00,000

1,99,052

Others

Bee Bee Polymers Ltd.

1,40,000

Richi Rich Overseas P Ltd.

2,00,250

2,26,735

Adani Finance Ltd.

8,83,000

3,51,708

e. As per the share transfer records furnished by Padmini, around 40-50 cases involving approx. 15,000 shares were delayed. In several cases, dispatches were made after six months of transfer. Some of these cases are mentioned below:

Name of Share holders

No. of shares

Time taken for transfer

Babulal Agarwal

100

158 days

Baby Rani Indugala

100

195 days

Ram Kumar Kamma

200

215 days

No satisfactory response was given by Padmini in respect of such delayed transfers.

f. Physical share certificates had been retained without cancellation even after underlying securities had been dematerialised.

3.47 The findings of investigations indicate that Padmini facilitated price manipulation of its shares by delay in transfer/ demat of shares and out of turn dematerialisation of shares to the benefit of certain entities. Such a large scale intentional delay in transfer & demat is a unfair trade practice relating to securities and is in violation of Regulation 6(c) of the FUTP Regulations which states that " No person shall intentionally and in contravention of any law for the time being in force delays the transfer of securities in the name of the transferee or the dispatch of securities or connected documents to any transferee." The above acts will undoubtedly establish that Padmini had violated the provisions of Regulations 6 (C) of the FUTP Regulations read with section 103 of the Companies Act, 1956. I note that the role of Padmini had become the party to the market manipulation made by KP entities.

3.48 Admittedly, Padmini made a presentation at Kolkata to the Kolkata based allottees before the preferential allotment and that it has also been admitted by Shri Vivek Nagpal that Padmini came to know that the Kolkata based allottees were persons acting in concert before the allotment of preferential shares. Further the shares to Kolkata based allottees were allotted without the actual receipt of the application money/ allotment money. The consideration from the said allottees were received by Padmini only after they had sold the shares to KP entities. KP entities had subsequently manipulated the market by using the said shares. In the facts and circumstances, where collusion is fairly established in the concatenation of events with all their suspicious undertones, Padmini cannot now take plea that it was not a party to the contract. There may not be any written agreement. I note that Punjab National Bank had sanctioned loans/limits to Padmini initially in 1990 which were enhanced from time to time. I also note that Padmini had pledged 14.10 lac shares registered in the name of directors/guarantors (Mr. Vivek Nagpal, Ms. Aarti Nagpal and Ms. Padma Nagpal) in March 2000 with Punjab National Bank as collateral security with an offer for compromise with the bank. As per the market rates prevailing at that time, the said shares were valued at around Rs. 200/- per share (aggregating Rs. 28 cr. Approx.).

3.49 I note that Padmini and its promoters were benefited by massive increase in the share price which enabled them to pledge 14.10 lacs shares @ Rs.200/- per share approx. as collateral security with Punjab National Bank for a compromise settlement. Therefore the acts of Padmini will establish that it had committed fraud on the general investors.

3.50 I also quote regulation 6 of FUTP Regulation for the sake of reference.

Prohibition on unfair trade practice relating to securities

6. No person shall -

(a) in the course of his business, knowingly engage in any act, or practice which would operate as a fraud upon any person in connection with the purchase or sale of, or any other dealing in, any securities;

(b) on his own behalf or on behalf of any person, knowingly buy, sell or otherwise deal in securities, pending the execution of any order of his client relating to the same security for purchase, sale or other dealings in respect of securities.

Nothing contained in this clause shall apply where according to the clients instruction, the transaction for the client is to be effected only under specified conditions or in specified circumstances;

(c) intentionally and in contravention of any law for the time being in force delays the transfer of securities in the name of the transferee or the despatch of securities or connected documents to any transferee;

(d) indulge in falsification of the books, accounts and records (whether maintained manually or in computer or in any other form);

(e) when acting as an agent, execute a transaction with a client at a price other than the price at which the transaction was executed by him, whether on a stock exchange or otherwise, or at a price other than the price at which it was offset against the transaction of another client.

3.51 In view of the above findings, it is fairly established that Padmini and its whole directors had violated Regulation 3, 6 (a), (c), (d) of FUTP Regulations and Section 113 of the Companies Act, 1956 which calls for a penalty under Section 11B of the Act.

4. ORDER

4.1 In view of the foregoing, I in exercise of the powers conferred upon me by virtue of section 19 read with section 11B of Securities and Exchange Board of India Act, 1992 read with regulation 10 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 2003 hereby prohibit Padmini Technologies Ltd. and its whole time directors viz. Shri Vivek Nagpal, Shri Vishnu Sarup Gupta and Shri Praveen Kumar Jain from associating with the capital market related activities including buying and selling and dealing in securities directly or indirectly and also from accessing the capital market in any capacity whatsoever and associating with any of the intermediary in the capital market for a period of five years.

4.2 This order will come into force with immediate effect.

__._,_.___

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