FREDIE ARDESHIR MEHTA Vs. UNION OF INDIA

JUDGEMENT

(1.) THE petitioners were, at the relevant time the directors of the Ahmedabad Advance Mills Ltd. , a company incorporated under the provisions of the Indian Companies Act 1882. On 31st May, 1977 the company purchased a flat in Clover Apartments at Cuffe Parade, Bombay for the sum of Rs. 1,84,00/- for accommodating the 7th petitioner, who was an employee of the company and its whole time director. It was agreed when the purchase was made that the 7th petitioner would have the option to purchase the flat during the course of his employment or within 12 months thereafter. On 14th September, 1978 an agreement was entered into between the company and 7th petitioner giving him such option on payment by him of Rs. 100/ -. On 29th November, 1978 the 7th petitioner exercised the option. He then paid to the company the sum of Rs. 92,000/- being half of the purchase price, and requested that the be allowed to pay the balance in three equal instalments. The companys board of directors thereupon passed a resolution. It approved the transfer of the flat to the 7th petitioner on the basis that half of the purchase price should be paid immediately and the balance in three yearly instalments with accruing interest at the rate of 6% per annum. In its Annual Report and Balance sheet and Accounts for the year ended 31st March, 1979, the company showed the amount due from the 7th petitioner under the head of Sundry debtors unsecured. On 20th February, 1980 the 7th petitioner paid to the company the balance purchase price and the sum of Rs. 6,685/- by way of interest thereon.

(2.) IN November and December 1981 the books and records of the company were inspected by the Assistant Inspecting Officer of the Office of the Regional Director, Department of Company Affairs, Bombay, under the provisions of section 209-A of the Companies Act, 1956. On 17th December, 1981 this officer wrote to the company stating that it had not complied with the provisions of section 297 and 301 of the Act in relation to the sale of the flat to the 7th petitioner. The company replied, and the alleged non-compliance with the aforementioned provisions was not pressed. Instead on 18th November, 1982 notices were addressed to petitioners alleging that, inasmuch as the balance purchase price of Rs. 92,000/- and the interest amount of Rs. 6,685/- had been paid by the 7th petitioner to the company after about 17 months, it amounted to the company giving a loan to the 7th petitioner. As prior approval of the Central Government pursuant to section 295 had not been taken by the company, the giving and taking of the loan amounted to an infringement of the provisions of section 295 (1) of the Act making the petitioners liable to be proceeded against under section 295 (4 ). The petitioners, through their Advocates, contended in reply that the financial accommodation that was given by the company to the 7th petitioner in the form of deferred payment of the balance purchase price did not amount to a loan and, therefore, the provisions of section 295 were not attracted.

(3.) ON 10th December, 1982 the Registrar of Companies filed a prosecution against the petitioners in the Court of the Additional Chief Metropolitan Magistrate at Bombay. He stated that the 7th petitioner had paid the sum of Rs. 92,000/- on 29th November, 1978 and the balance amount of Rs. 92,000/- together with interest in the sum of Rs. 6,685/- only on 20th February, 1980. He alleged : "the amount due from Shri Gonda (the 7th petitioner) was not on account of any of the normal trading or business activities of the company as it is not the business of the company to deal in immoveable property and, therefore, the amount of Rs. 92,000/- due from Shri Gonda to the company and such financial assistance and deferred part payment amounts to and shall be treated as loan to a director without the previous approval of the Central Government and thereby the accused have contravened the provisions of section 295 (1) (a) punishable under section 295 (4) of the Companies Act, 1956".