Appellate Tribunal For Forfeited Property : This will dispose of two appeals, bearing Nos. 3 and 4/Cal/1989 moved by Shri Chandan Kumar Saha and Shri Gaur Chandra Saha, respectively.

Appellate Tribunal For Forfeited Property

Chandan Kumar Saha vs. Competent Authority Gaur Chandra Saha vs. Competent Authority

Khanna, J. (Chairman); G.R. Patwardhan & P. R. Rao, J. (Members)

P. A. Nos. 3 and 4 of 1989

11th April, 1989

Counsel Appeared
O. P. Bhati, for the Appellant : S. R. Chaudhury, for the Respondent


This will dispose of two appeals, bearing Nos. 3 and 4/Cal/1989 moved by Shri Chandan Kumar Saha and Shri Gaur Chandra Saha, respectively. They are against two similar orders of the Competent Authority, Calcutta, under s. 7(1) and (3) of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (hereinafter referred to as “the SAFEMA”), forfeiting their respective balances of capital in the partnership business “Lakshmi Bhandar”, P. O. Dhubri, District Goalpara, Assam. This firm was constituted in the year 1972 with three partners, two of whom are the appellants before us and the third is Gopal Chandra Saha. Chandan Kumar Saha had then introduced Rs. 31,900 as his capital in the partnership while the investment of Gaur Chandra Saha was Rs. 34,100. They have been assessed to income-tax ever since. At no stage was the genuineness of these investments disputed by the ITO. The assessment orders for the initial years filed before us show that they were under s. 143(1) of the IT Act. Subsequently, the assessments were said to be under s. 143(3). The appellants have, however, filed copies of their submissions in writing made on 17th May, 1974, before the ITO in which they had explained as per the ITO’s verbal enquiry regarding the deposit of capital amounts, that they had been withdrawn from their individual books of accounts and they were assessed earlier also individually. These writings thus bring out that the ITO did make enquiries about the source of these investments, though he still chose to make the assessments under s. 143 ( 1).The ground on which the proceedings under the SAFEMA were initiated was that Gopal Chandra Saha, the third partner in Lakshmi Bhandar, was detained under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act on 5th Nov., 1975, and this detention was revoked by the Government and he was released on 22nd March, 1977, on the lifting of the Emergency. The Competent Authority, therefore, felt that both the appellants being partners of the said firm, Gopal Chandra Saha, the detenu fell within the mischief of the term “person” under s. 2.(2)(b) of the SAFEMA against whom forfeiture proceedings could be taken. Notices under s. 6(1) of the SAFEMA were issued on 11th Jan., 1978, after recording in writing that he was satisfied that these were fit cases for their issue of those notices. The records of the proceedings of the Competent Authority show that the counsel for the parties appeared in the proceedings and filed explanations. The Competent Authority recorded on 29th March, 1978, that the cases were partly heard and the matters adjourned to 22nd April, 1978. The proceedings on the adjourned date show that the cases were adjourned to 6th May, 1978, giving another opportunity to lead evidence. No hearing was held on 6th May, 1978, and, thereafter, for more than ten years, the cases were kept in cold storage. They were again revived on 16th May, 1988, by another incumbent of the office of the Competent Authority who, after observing that he had gone through the records and considered the materials available, and having applied his mind and agreed with the reasons recorded by the earlier Competent Authority, which led to the issue of notices under s. 6(1), decided to continue the proceedings from the stage at which they were left by his predecessor.

The appellants contested these proceedings and, inter alia, pleaded that they could not be treated as “persons” against whom proceedings could be taken under the Act and also pointed out that Gopal Chandra Saha, the detenu, has challenged his detention before the Supreme Court and the matter was lying admitted there. Till such time as the validity of the detention was determined, proceedings against them were sub judice and, therefore, they should not be proceeded against. It was further pointed out by them that they had been running their individual businesses before entering into partnership under the name “Lakshmi Bhandar” and had duly filed income-tax returns for those errands from the asst. yr. 1970-71 onwards and had sufficient funds available with them to justify their investments in the partnership. The Competent Authority, however, directed forfeiture of the respective share capital in the said firm by the impugned orders made in November, 1988, under s. 7(1)(3) of the SAFEMA. Feeling aggrieved, the appellants have moved these appeals before us.We have heard the parties and gone through the facts and circumstances of the case. Sec. 6(1) of the Act postulates that if, having regard to the value of the properties held by any person to whom the Act applies, either by himself or through any other person on his behalf, his known sources of income, earnings or assets, etc., and any other informalion or material available to it as a result of action taken under s. 18 or otherwise, the Competent Authority, after recording reasons to believe in writing that all or any of them are illegally acquired properties may serve a notice upon such person calling upon him to indicate the source of his income, earnings or assets, out of which or by means of which the property had been acquired, and so on. This section thus presupposes due application of mind and subjective satisfaction of the Competent Authority warranting “reasons to believe”, and those reasons should be recorded in writing to the effect that the property sought to be proceeded against is an illegally acquired property. The section further enjoins that in order to reach the formation of “reasons to believe”, he should avail of, apart from the disproportionate nature of his holdings vis-a-vis his known sources of income, any other information or material available as a result of action taken under s. 18 or otherwise. That s. 18 of the Act vests power in the Competent Authority for the purpose of any proceedings or their initiation under the Act to cause to be conducted any inquiry, investigation or survey in respect of any person, place, property, etc., and for this require an officer of the IT Department to conduct or cause to be conducted such enquiry, investigation or survey. This has thus to precede the recording of “the reasons to believe” and issue of notice under s. 6(1). Unfortunately, none such was resorted to. This is a sanguine provision of law so that no reckless or ill-founded proceedings are embarked upon and further that no person is required to pass through the grill, harassment or stigma of the proceedings under that Act. This investigation under s. 18 should be the rule rather than an exception and should all the more be adhered to when a person is sought to be saddled for the omissions and commissions of some others because of the wide definition of “person” under s. 2(2) of the Act. The “reasons to believe” have thus to be genuine and not a mere pretence.

The “reasons to believe” before the issue of notice under s. 6(1) of the SAFEMA were recorded in the present cases by the Competent Authority on 11th Jan., 1978. They are similar in both the cases except for the amounts of capital investment in the partnership in the asst. yr. 1973-74. It is recorded that none of these appellants were assessed to income-tax nor is known to have had any legal source of income of his own prior to his joining the partnership firm “Lakshmi Bhandar”. There is no semblance of mention that any enquiry or investigation was made under s. 18 of the Act or that the IT Department had enquired as to whether they actually were such assessees or not. It is noteworthy to mention that investigation agencies have been created under the Competent Authorities, but there is nothing to show that any inspector or other official was deputed to go to the IT Department for making an enquiry in this regard or that the appellants were contacted for ascertaining whether they had prima facie any explanation for their assets. No investigation under s. 18 was also carried out. Instead, there was a wrong statement in the so-called “reasons to believe” recorded by the Competent Authority that they were not assessees, while the reality was that they in fact were.

The appellants have, therefore, vigorously assailed these reasons, and pleaded that there was no genuine application of mind by the Competent Authority. and that these were mere mechanical reasons recorded. The appellants hare produced copies of the assessment orders for the asst. yrs. 1970-71 to 1972-73 showing that they were assessed to income-tax. Along with them, statements of accounts were filed mentioning their initial investments in the financial year 1969-70 in the business, the profits earned from them, the withdrawals made and the balances carried forward. Chandan Kumar Saha’s initial capital was Rs. 20,500 while that of Gaur Chandra Saha’s Rs. 22,300. The closing balances at the end of the previous year relevant to the asst. yr. 1972-73 were sufficient to justify their investments in the partnership” Lakshmi Bhandar”. These businesses were closed by them then.

From the side of the Competent Authority, it has been pointed out that the returns for these three years were filed in 1972 and the assessments were made under s. 143(1) by accepting the returns. However that may be, those statements of their state of affairs were filed long before the enactment of the SAFEMA and, therefore, could not be treated as motivated to save their properties from forfeiture under an enactment which was nowhere visualised then. They had asserted that the initial capital invested in their individual businesses was from the savings out of businesses carried on in the past. At that stage, the incomes were not assessable. Thus they came out twice with categorical assertions of the money available with them, once in the financial year 1969-70 and again in the financial year 1972-73. Some enquiries were in fact made by the ITO. Thus they exposed themselves to the risk of investigation by the IT authorities and that in a way reflects their good faith. If the ITO did not choose to investigate further, they cannot be now penalised after the expiry of almost 20 years. Whether they kept any account books of those businesses or they are no longer available is of no material consequence, as the law did not oblige them to keep such accounts or to keep them for so long. Subsequently, when the assessments of the firm were made under s. 143(3), the ITO did not again dispute the capital investment nor chose to convert the past assessments into those under s. 143(3) or reopen them under s. 147/148 of the IT Act. We have come across cases where assessments have been sought to be reopened after almost ten to fifteen years. The inaction of the ITO in this direction, therefore, was a material consideration in favour of the appellants, and unless something significant or cogent to the contrary had been brought out by the Competent Authority, this could not have been lightly interfered with. Sec. 21 of the SAFEMA could also not come to the rescue in any manner inasmuch as it makes any finding of any other office or authority as not conclusive for purposes of any proceedings under this Act. The relevancy and persuasive impact of those findings or orders cannot, however, be ignored especially when they were much nearer to the time of occurrence.

The Competent Authority, therefore, formed the “reasons to believe” to initiate proceedings under s. 6 without genuine application of mind and in a perfunctory manner. Material factors were ignored and the rationale and the mandate of s. 6 bypassed. The position of law in this regard is well-settled that when a subjective satisfaction is sought to be arrived at for exercise of power, though the appellate authority would not substitute the same with that of its own, it would be justified to look into whether, in arriving at that satisfaction, the concerned authority ignored certain material facts and circumstances. Whether those facts and material could have still enabled him to come to the same conclusion is entirely irrelevant. No speculation in this regard has to be entered into by the appellate body or the Court while considering the validity of that satisfaction. It is the non-consideration of such material alone which would render the same as unsustainable in law. It need hardly be impressed in this regard that the SAFEMA is a very drastic law entailing forfeiture of properties. Its provisions have, therefore, to be strictly complied with and no person should be deprived of his property unless there are cogent circumstances in this direction. It may as well be pointed out in this regard that mere non-payment of income-tax, wealth-tax, estate duty, etc., would not render possession of a particular property as unexplained, as there are ample laws de hors the SAFEMA to take care of them. A person can commit defaults and still have legitimate holdings with him. The confiscatory provisions, being penal in character, therefore, should not be lightly or too readily resorted to. It was for this end that the Legislature has, in its wisdom, required proper investigation under s. 18 of the Act before the ball is set rolling under s. 6 of the Act.

The position in law has been discussed at length by the Supreme Court in its decision in the case of Union of India vs. Manoharlal Narang, AIR 1987 SC 1472. It was observed as follows :”If the detaining authority had considered the order of this Court, one cannot state with definiteness which way his subjective satisfaction would have reacted. This order could have persuaded the detaining authority to desist from passing the order of detention since this Court had allowed freedom of movement. Detention is only a preventive act. This Court did not find it necessary to restrict the liberty of Ramlal when the order on the stay application was passed. It may also be that the detaining authority, after considering the order of this Court carefully, could still feel that an order of detention is necessary with reference to other materials which outweigh the effect of this Court’s order. In all these cases, non-application of mind on a vital and relevant material need not necessarily lead to the conclusion that application of mind in such materials would always be in favour of the detenu. Application of mind in such cases is insisted upon to enable the detaining authority to consider one way or the other, as to what effect a relevant material could have, on the authority that decides the detention. In our view, the absence of consideration of this important document amounts to non-application of mind on the part of the detaining authority rendering the detention order invalid.” Similarly, in Ashadevi vs. K. Shivraj, AIR 1979 SC 447, where the District Magistrate failed to consider that a criminal case against the detenu had been dropped, the detention was quashed.

There can, therefore, be little doubt that the entire proceedings in the present cases under the SAFEMA suffer from initial invalidity as there was no proper application of mind and the satisfaction of “reasons to believe” by the Competent Authority. He had failed to take note that the two appellants were assessees in the past before joining the partnership. Rather he proceeded on the premises that they were non-assessees. The non-consideration of the former renders the entire proceedings vitiated. This is irrespective of what impact those assessments would have had on the Competent Authority though, as already discussed above, the disclosures in the returns then had gone a long way to establish the existence of funds with the appellants.

Even otherwise, there was material irregularity in the proceedings and breach of the principles of natural justice when the appellants applied for inspection of the documents on which the Competent Authority had relied and also sought copies thereof. The Competent Authority rejected the prayer in this regard by a communication dt. 20th March, 1978, to the appellants. The appellants were thus materially prejudiced in not being allowed inspection and ‘to take copies of the documents by which the Competent Authority had been influenced.

It is next significant to mention that Gopal Chandra Saha was proceeded against under the Customs Act for being in possession of powdermilk and bidi leaves. In the former case, a penalty of Rs. 50 was levied against him while in the other, the leaves were confiscated and some penalty imposed. These appear to have been the only offences which resulted in his detention. However, after the detention, the appeals against these penalties and confiscation were allowed by the Appellate Collector of Customs in 1976. Copies of the orders thereof have been filed before us. Since they have come from official records, they have been taken note of in these appeals. It is not shown that the other partners also were involved in those cases or the milk powder and bidi leaves were recovered from the firm’s premises. The partnership does not deal with those items. It or its partners were thus not involved in the same and this is borne out from the circumstance that the firm or the other partners were not implicated in the proceedings under the Customs Act. We are not, at this stage, venturing to express any opinion on the validity of the detention as the matter is sub judice before the Supreme Court. However, it is relevant for consideration whether the present appellants could have been proceeded against under the SAFEMA. Sec. 2(2)(e), Explanation 3(iii) reads as, under: “any association of persons, BOI, partnership firm, or private company within the meaning of the Companies Act, 1956, of which such person had been or is a member, partner or director . . . “

It is under this provision that the appellants as partners of Gopal Chandra Saha are sought to be proceeded against by the Competent Authority. However, sub-cl. (iv) next is to the following effect : “(iv) any individual who had been or is a member, partner or director of an AOP, BOI, partnership firm or private company referred to in cl. (iii) at any time when such-person had been or is a member, partner or director of such association, body, partnership firm or private company. . .” This sub-clause is thus supplementary to sub-cl. (iii) and shows that the offence or illegality by a partner can open consequences under the SAFEMA on other partners only if the former had acted in the course of the partnership business. When this was not the position, it is difficult to see how the present appellants could be made accountable for individual acts and omissions of other persons who were not connected in any manner with the partnership. Explanation 4 to this section is of no avail as that only permits taking into account facts which took place before the enactment of the statute. This Tribunal had the occasion to make some observations on the liability of relations, persons or associates, in Mira Rant Mazumdar vs. Competent Authority ( 19871 166 ITR 230 (ATFP) while taking note that the definition of the term “person” in s. 2 of the SAFEMA is wide embracing and this was to cover clandestine holding of properties in other persons’ names by smugglers and foreign exchange manipulators, and tracing and pursuing them in their hands. It was observed : “However, at the same time, one has to act with caution and circumspection so that the relations, partners or associates who may have otherwise nothing to do with smuggling or foreign exchange manipulations or properties connected therewith, and may be, even ignorant of the activities of the detenu, are not unnecessarily harassed and penalised. Some semblance of nexus may be desirable. . .”

Another peculiarity in the present case is that when the earlier Competent Authority did not proceed further in the proceedings after 22nd April, 1978, his successor restarted them without any special reasons more than ten years later in May, 1988. In case the proceedings were earlier left in abeyance because of the pendency of the challenge to detention under the COFEPOSA Act before the Supreme Court, that circumstance had not changed in May, 1988. The writ petition in this regard is still pending.

The following observations in Mira Rani Mazumdar’s case (supra) may be referred to here with advantage : “Similarly, when no time factor is prescribed with regard to the acquisition of assets, and the forfeiture process may commence even with regard to properties acquired before the enactment of this legislation, still a reasonable limit has to be kept in view and no long-buried graves may be dug out. This may appear appropriate also as human memory limitations to explain the source of acquisitions of properties acquired long back cannot be ignored. At the same time, where some positive nexus with clandestine activities exists or is patently a pointer, the time factor alone should not stand in the way of the forfeiture process. It may not be out of place to mention here that even under the IT Act, vide ss. 147 and 148, where income has escaped assessment on the omission or failure of the assessee to make disclosure or on information received independently, the ITO is entitled to start assessment or reopen past assessments if the income pertains to a period of four years or eight years. It is only in exceptional circumstances where the amount involved is fairly large that the period is extended up to 16 years. “

Even under the Narcotic Drugs and Psychotropic Substances (Amendment) Act, 1988, which has analogous forfeiture provisions as in the SAFEMA, the proviso to s. 68C prescribes a limitation of six years from the acquisition of the property within which forfeiture can be effected. It reads as under :” . . . provided that no property shall be forfeited under this Chapter if such property was acquired by a person to whom this Act applies before a period of six years from the date on which he was charged for an offence relating to illicit traffic . . .”

The Bombay High Court as well, in a recent decision in the case of CIT vs. Harinagar Sugar Mills Ltd. (1988) 74 CTR (Bom) 10 : (1989) 176 ITR 289 (Bom), observed that even where no limitation is prescribed for taking recourse to a statutory provision, delay or rather inordinate delay may be an aspect which the Court can consider for quashing the proceedings.

Even under the Limitation Act, the provisions of which are otherwise not technically applicable to the SAFEMA where no period of limitation is prescribed elsewhere in the schedule or the division, the suit or application can be brought within three years of the accrual of the right to sue or apply, vide Arts. 113 and 137. In the CPC also, limitation has started to be introduced with regard to certain types of offences.

The inordinate delay of over ten years in the present case in reviving the proceedings has not been explained by the Competent Authority. Had the case been one where, for certain reasons or happening of events, the proceedings had been stayed, and those reasons have disappeared or events have happened, the revival would be permissible after their so happening. Limitation in such cases may have to be ignored. However, in the present cases, no such circumstances have been brought out. The inordinate delay of more than ten years, therefore, in the present cases, vitiates the proceedings under the impugned orders.

The result, therefore, is that the appeals are allowed and the impugned orders quashed.

[Citation : 179 ITR 183]

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