Legal Advisor for SEBI Act Compliance

BY P.K.MITTAL B. Com, LLB, FCS ADVOCATE DELHI HIGH COURT CENTRAL COUNCIL MEMBER – “THE INSTITUTE OF COMPANY SECRETARIES OF INDIA. “ ADVISOR :- PKMG LAW CHAMBERS Mobile 9811044365,9911044365

SECTION 11C OF THE SEBI ACT: (4)The investing agency may keep in its custody any books, registers, other documents and record produced under sub-section (2) or sub-section (3) for six months and thereafter shall return the same to any intgermediary or any person associated with securities market by whom or on whose behalf of books, registers, other documents and record and produced. Provied that……………………………………

Provided further that if the person on whose behalf the books, registers, other documents and record are produced requires certified copies of the books, registers, other documents and record produced before the Investigating Authority, it shall give certified copies of such books, registers, other documents and record to such person or on whose behalf the books, registers, other documents and record were produced.

STANDARD OF PROOF The standard of proof in a civil case is preponderance of probabilities. In a civil case, there is no burden cast on any party similar to the one in a criminal proceeding.

The Supreme Court in the case of CIT v. Durga Prasad More, MANU/SC/0321/1971 (S.C.) has held that science has not yet invented any instrument to test the reliability of the evidence placed before a Court or a Tribunal. Therefore, the courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. Human minds may differ as to reliability of a piece of evidence. But in that sphere, the decision of the final fact finding Authority is made conclusive by law.

The normal rule which governs civil proceedings is that a fact can be said to be established if it is proved by a preponderance of probabilities. A fact is said to be proved when the court either believes it to exist or considers its existence so probable that a prudent man ought, under the circumstances of the particular case to act upon the supposition that it exists. The belief regarding the existence of a fact may thus be founded on a balance of probabilities.

A prudent man faced with conflicting probabilities concerning a fact situation will act on the supposition that the fact exists, if on weighing the various probabilities he finds that the preponderance is in favour of the existence of the particular fact. As a prudent man, so the court applies this test for finding whether a fact in issue can be said to be proved.

The Division Bench of Punjab & Haryana High Court in the case of CCE Vs. Zeto Engineering (P) Ltd 2008(232) ELT 403 (P&H) has held that “ any materials which was collected by the Department at the back of the assessee in the preliminary inviestigation was not supplied to the assessee, though it has been recorded in the order passed by Adjudicating Authority that assessee never collected the material.

Since the assessee did not have the opportunity to go through and confront the materials collected by the Department and in the absence of which, the assessee cannot possibly defend its case. Hence, it is a clear case of violation of principle of natural justice.

The Bombay High Court in the case of Gyan Chand Sant Lal Jain v. UOI (2001 (136) E.L.T. 9 (Bom.) - taking into consideration the applicability of concept of principles of natural justice in that regard quoted para 76 of Halsbury's Law of England, Vol. I (4th Edition) which reads thus:

Natural justice does not impose on administrative and domestic tribunals a duty to observe all the technical rules of evidence applicable to proceedings before courts of law. Members of tribunals may be entitled to draw on their specialized or local knowledge of the type of, issue before them in order to supplement as well as evaluate evidence to find facts by inquisitorial methods, and inspections and to obtain information from other persons; but it will generally be a denial of justice to fail to disclose to a party specific material relevant to the decision if he is thereby deprived of any opportunity of comment on it.

The Hon'ble High Court observed thus: In other words, it seems to be a fairly settled position in law that it is not necessary that persons whose statements have been previously recorded must be examined in the presence of the party against whom such previous statements are intended to be used. The rules of natural justice do require that their previous statements must be made available to the party against whom they were intended to be used and such party must be given a fair opportunity to explain the same or comment on them. What would amount to fair opportunity would depend upon the facts and circumstances of each case....

In M.P. Sharma v. Satish MANU/SC/0018/1954 : AIR 1954 SC 300, it was held by the Apex Court that the test to be applied, both in civil and in criminal cases, for considering whether evidence is admissible, is whether it is relevant to the matter in issue. If it is admissible, then Court is not concerned about how it was obtained.

The Supreme Court in the case of Khet Singh v. Union of India MANU/SC/0205/2002 : 2002 (142) ELT 13 (SC), has held that the documents recovered in course of search of the premises can be considered even if the search is not legal, unless there is evidence that the documents themselves have been tampered with,

The Hon’ble Supreme Court in the case of Tribhuvandas Bhimji Zaveri Vs. CCE 1997(92) ELT 467 (SC) has held that in case the documents relied upon have not been supplied by the Department, on the contention that the same are not available, the principle of natural justice violated and the judgment/order is liable to be set aside. The Division Bench of the Bombay High Court in the case of Kellogg India (P) Ltd Vs. UOI 2006(193) ELT 385 (Bom) has observed as under:-

In our view, the above principle would apply even where the petitioner has been denied opportunity to have the contents of the Test Reports relied upon by the Respondents before the adjudicating authority. In our view, the adjudicating authority was, obviously, in error in not directing the Respondents to supply copies of the Test Reports to the petitioners. A document to be relevant may support either the Revenue or the Petitioner. No adjudicating authority can, therefore, refuse production of such a document simply because that document which is to be used against the subject is not relevant in its perception.

The Division Bench of the Bombay High Court in the case of Kantilal Parekh Vs. Union of India 2003(158) ELT 678 (Bom) has observed as under:- The petitioner has approached the Respondent with a request to supply documents and the material on the basis of which the show cause notice was framed. The Controller of Imports and Exports in reply, vide letter dated 10th September, 1986, called upon the petitioner to attend his office in Delhi on 8th October, 1986 during office hours, to take inspection of the relevant record available with him. Accordingly, the petitioner along with his counsel has been to the office of the Controller at Delhi.

But, on the said date, the petitioner was not given any inspection of the documents. On the contrary, he was told that beyond the allegations made in para 7 of the show cause notice, no other documents were with them. If that be so, it was not necessary to call upon the petitioner to attend the office of the Controller at New Delhi. It is, therefore, clear that no documents were made available to the petitioner on the basis of which, show cause notice was issued. In view of the above, it is clear that the impugned order is clearly in breach of principle of natural justice.

The Division Bench of the Rajasthan High Court in the case of PGO Processor P Ltd Vs. CCE 2000(41) RLT 741 (Raj) has held that “ assessee has a right to be supplied with authenticated copies of documents relied upon in the Show Cause Notice. It was made very specifically clear that the opportunity given to inspect and to obtain photocopies is not enough.

The Division Bench of the Bombay High Court in the case of Silicon Graphics System India (P) Ltd 2006(204) ELT 247 (Bom) has held that “ unrelied upon documents may not be relevant for department but may be relevant for affected party to prepare reply to the Show Cause Notice. Any request made for supply of those documents cannot be termed as “frivolous”.

The Hon’ble Supreme Court in the case of Kothari Filaments Ltd Vs. CCE 2009 RLR 112 (SC) has held that “ if an enquiry authorities make use of any document or documents then they should supply copies of those documents to the person accused or opponent or must allow inspection of the same, denial of which shall amount to violation of principle of natural justice.

The Division Bench of CESTAT in the case of Suryanaraya Silk Mills Vs. CCE 2008(232) ELT 444 (Tri) has held that documents relied upon by the Department must be supplied and mere availability for inspection is not enough. It is entirely a prerogative of assessee to examine and look into them and the Department cannot ask for purpose for which the documents are sought for.

Section 11(5) reads as under:- (5) Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before it personally.

The Apex Court in the case of Surjeet Singh Chhabra v. Union of India MANU/SC/0660/1997 : 1997 (89) ELT 646 (SC) and the High Court of Madras in the case of Roshan Beevi and Ors. v. Joint Secy. to Govt. of Tamil Nadu MANU/TN/0028/1983 : 1984 (15) ELT 289 has held that the Customs Authorities not being Police Officers, oral evidence recorded Under Section 108 of the Customs Act, 1962 even if confessional statement are usable against such persons and binding on him.

The Supreme Court in cases of (i) Naresh J. Sukhwani v. Union of India reported in MANU/SC/0127/1996 : 1996 (83) ELT 258 (SC), (ii) K I Pavunny v. Assistant Collector of Customs reported in MANU/SC/2070/1997 : 1997 (90) ELT 241 and (iii) Surjeet Singh Chhabra v. U.O.I. reported in 1997 (89) ELT-465 (SC) has held that inculpatory statement recorded under Section 108 of the Customs Act, 1962, have to be treated as substantive evidence.

The Supreme Court in the case of Veera Ibrahim v. State of Maharashtra, MANU/SC/0514/1976 : AIR 1976 SC 1167: 1983 (13) E.L.T. 1590 (S.C.), has held that the statements of the witnesses recorded who were not formally accused of any offence were not being hit by Constitutional guarantee, were admissible in evidence when those were recorded under Section 14 of Central Excise Act, 1944 (equivalent to Section 11(5) of the SEBI Act) in the course of judicial proceeding

The Supreme Court in Nagubai Ammal and Ors. v. B. Shama Rao and Ors. reported in MANU/SC/0089/1956 : AIR 1956 SC 593 had ruled that an admission is not conclusive as to the truth of the matters stated therein. It was further held that it must be shown that there is a clear and unambiguous statement such as will be conclusive, unless explained.

A statement recorded by Customs Officers under Section 108 of the Customs Act being admissible in evidence as held in CCE v. Duncan Agro Industries reported in MANU/SC/0486/2000 : 2000 (120) E.L.T. 280 (S.C.), the court has to test whether the inculpating portions were made voluntarily or whether it is vitiated on account of any of the premises envisaged in Section 24 of the Evidence Act. (confession caused by inducement, threat or promise) Nothing could be demonstrated to impeach the statements recorded.

In the Apex Court decision in the case of K.T.M.S. Mohammed and Ors. v. UOI MANU/SC/0349/1992 : 1992 SCC (3) 178 to submit that mere retraction of an evidence recorded under Section 108 of Customs of Act, 1962 is not sufficient to take opportunity at a later date to plead that as value less when the maker of statement fails to establish that improper means was adopted to record such evidence.

The Supreme Court in the case of C. Sampat Kumar v. Enforcement Officer, Enforcement Directorate -MANU/SC/1332/1997 : 1997 (8) SCC 358: 1997 (96) E.L.T. 511 (S.C.) has held that statement not being extracted under compulsion and remaining un-retracted shall be safely relied.

The decision of the Madras High Court in Deputy director of Enforcement v. A.M. Ceaser reported in MANU/TN/1069/1998 : 1999 (113) ELT 804 is based upon the law laid down by the Apex Court in K.I. Pavunny v. Asst. Collector, Central Excise Collectorate reported in MANU/SC/2070/1997 : 1997 (90) ELT 241 and Bagwan Singh v. State of Punjab reported in MANU/SC/0035/1952 : AIR 1952 S.C. 214.

The law laid down in those decisions on the subject was to the effect that if the Court is required to rely upon any statement of the party to the proceedings said to have admitted certain facts, and thereafter statement stated to have been retracted, the Court has to examine whether the statement was voluntary, whether it was not obtained by threat, duress or promise and on satisfaction in that regard from the evidence on record that it was voluntary then it is required to examine whether the statement is true.

In case of disputed or retracted admission in the form of statement recorded by such authorities, therefore, it is invariably necessary to ascertain whether there was any threat duress or promise in relation to such statement being made by the party and the same is to be ascertained on the basis of evidence on record and on satisfactory answer in that regard Court thereafter has to ascertain whether the statement is a true one or not. Obviously, for that purpose also the authority will have to analyse the evidence on record.

The Supreme Court in the case of Shri Krishnan Vs. Kurukshetra University AIR 1976 SC 376. has held that the admission made in ignorance of legal rights or under duress cannot bind the maker of admission.

When the Appellant asks for opportunity of cross-examination of witnesses relied upon by the Department (even in the reply to the show cause notice), such cross examination must be allowed and failure or refusal would be held to be violation of principle of natural justice. Laxman Export Ltd Vs. CCE 2002 (143) ELT 21 (SC). The Adjudicating Authority cannot call upon the noticee to disclose the reasons with explanations, dis-allowing cross-examination was held in violation of the law of natural ujustice. CCE Vs. Amrutbhai Vasudebhai Patel 2003(156) ELT 222 (Tri).

The CESTAT in the case of Rath Ispat Ltd Vs. CCE 2001(129) ELT 701 (Tri – Delhi) has held that “ officers connected with the investigation should be made available by the Department for the purpose of cross-examination. Likewise, the Expert who conducted the Test and whose report has been relied upon by the Department, must be made available for cross-examination At the same time, if the Department is relying upon the same “ Test Report”, then the assessee has right of “ Re-Testing”.

The Bombay High Court in the case of Nagraj Walchand JainVs. G Koruthu 2000(123) ELT 50 (Bom) has held that refusal to allow cross-examination of six witnesses relied on by the Department violates the principles of natural justice.

In Ganga Rubber Industries v. CCE reported in MANU/CE/0454/1987 : 1989 (39) ELT 650, it was held that it is for the Department to establish that the entries in books recovered in the course of investigation were genuine and the fact that such verification was done has to be established by the Department. In the absence of proof about entries in the books to be representing actual clandestine removal, it cannot be said that the Revenue has discharged its burden.

In Emmtex Synthetics Ltd. v. CCE, New Delhi reported in MANU/CB/0037/2003 2003 (157) ELT 120, it was held that in the course of tangible evidence, no presumption on the basis of uncorroborated, uncross-examined testimony of the witnesses or entries in private diaries or loose sheets or charts can be drawn to support the charge of clandestine removal of the goods.

There is no materials brought on record to show that any part of the seized documents were tampered with or there was any interpolations, that the admitted facts need not be proved

a) P.K. Ravindran reported in MANU/TN/0913/2001 b) Khet Singh v. Union of India MANU/SC/0205/2002 : 2002 (142) ELT 13 (SC), c) CCE, Madras v. Systems and Communications Pvt. Ltd. reported in MANU/SC/0208/2004 : 2004 (165) ELT 136 (SC)

It is cardinal principle of law that fraud nullifies every thing. When deliberate breach of law was made by Appellants suppressing the value of "adjusted sale price" determinable with reference to MRP declared and nothing was demonstrated that the Authority below merely acted on imagination while the adjudication was based on cogent evidence, the plea of time-bar becomes unsustainable. Duty liability under law is bound to be fastened including penalty that shall be leviable.

In the leading English case i.e. Derry and Ors. v. Peek 1886 All ER 1 what constitutes "fraud" was described thus: "fraud" is proved when it is shown that a false representation has been made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be considered by Apex Court in true or false".

This aspect of the matter has been dealt in Roshan Deen v. Preeti Lal [MANU/SC/0701/2001 : 2002 (1) SCC 100], Ram Preeti Yadav v. U.P. Board of High School and Intermediate Education [MANU/SC/0683/2003 : 2003 (8) SCC 311], Ram Chandra Singh's case (supra) and Ashok Leyknd Ltd. v. State of T.N. and Anr. [MANU/SC/0020/2004 : 2004 3 SCC 1]. Suppression of a material amounts to fraud on the court -see: Gowrishankar v. Joshi Amha Shankar Family Trust, [MANU/SC/0555/1996 : 1996 (3) SCC 310] and S.P. Chengalvaraya Naidu's case AIR 1994 SC 853.

The Supreme Court in the case of New Horizons Ltd. & Ar. v. Union of India and Ors. MANU/SC/0564/1995 : 1995 (1) SCC 478 to argue that the Courts can always see through corporate Veil to ascertain the true nature of the company. Doctrine of lifting veil, piercing the veil, peeping or seeing through the veil is invoked when the corporate personality is found to be opposed to justice, convenience or interest of Revenue. Section 11C (9) Visit of Investigating Agency with authorization from Magistrate

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Legal Advisor for SEBI Act Compliance