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Suman L. Shah vs. The Custodian & Ors.

Not available · 2024 INSC 170Decided 5 Mar 2024
Not available
Justice Pamidighantam Sri Narasimha · Justice Sandeep Mehta

Background

In the early 1990s securities scam, Fairgrowth Financial Services Ltd. (FFSL) was notified as an offender company, and one Pallav Sheth (its debtor) was later notified in 2001, automatically attaching his properties. The Custodian alleged that certain companies which had lent money to the appellants (Suman L. Shah and Laxmichand Shah) back in 1996-97 were actually "benami" (proxy) companies secretly owned by Pallav Sheth, and sought recovery of those loan amounts (Rs. 50 lakhs and Rs. 25 lakhs) from the appellants as garnishees. The Special Court, Bombay ruled against the appellants, holding they had not proved repayment of the loans.

Decision Breakdown

The Supreme Court set aside the Special Court's judgments and allowed the appeals. It held that the loans were taken years before Pallav Sheth was ever notified as an offender (2001), so the appellants could not have known of any taint at the time. More importantly, the entire case against the appellants rested on an unproven letter from the Income Tax Department: no departmental witness was examined to prove it, and the department's own affidavit before the Special Court did not even mention the alleged debt. Under Sections 101-102 of the Evidence Act, the Custodian bore the primary burden of proving the debt existed before the onus could shift to the appellants to disprove it; since that primary burden was never discharged, the Special Court erred in shifting the onus onto the appellants merely because they could not produce decades-old account books.

Lesson Learnt

A claimant seeking recovery must first prove the existence of the debt with real evidence (not an unproved letter or hearsay document) before the burden shifts to the other side, and courts should not penalise a party for failing to produce records that no law required them to preserve for over a decade.

Official source (sci.gov.in)View Judgment (PDF)

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