JAYKISHOR CHATURVEDI & ETC. versus SECURITIES AND EXCHANGE BOARD OF INDIA

Summary

Promoter-directors penalised by SEBI's Adjudicating Officer in 2014 for insider trading violations, whose penalties were affirmed by this Court in 2019, challenged recovery and attachment notices demanding interest at 12% per annum from the date of the adjudication orders. The Court held that under Section 28A of the SEBI Act read with Section 220 of the Income Tax Act, 1961, interest on an unpaid penalty is leviable by operation of law even if the adjudication order is silent on interest, that the adjudication order fixing a 45-day period for payment itself operates as the notice of demand because Section 156 of the Income Tax Act is not incorporated into the SEBI Act, and that interest therefore runs from the expiry of that 45-day period, Explanation 4 to Section 28A (2019) being merely clarificatory. The appeals were dismissed.

Issues

1. Whether interest is payable on penalties imposed by SEBI's Adjudicating Officer when the adjudication orders did not themselves direct payment of interest.
2. Whether interest under Section 28A of the SEBI Act read with Section 220(2) of the Income Tax Act, 1961 accrues from the expiry of the payment period fixed in the adjudication order or only from 30 days after the Recovery Officer's demand notice.
3. Whether Explanation 4 to Section 28A of the SEBI Act, inserted with effect from 21.02.2019, is a substantive change that cannot apply to adjudication orders passed earlier, or merely clarificatory.
4. Whether the reference to Income Tax Act provisions in Section 28A is legislation by incorporation or by reference, and whether Section 156 of the Income Tax Act applies to SEBI recoveries.

Provisions considered

• Section 28A (including Explanation 4), Securities and Exchange Board of India Act, 1992Inserted with effect from 18.07.2013, Section 28A enables the Recovery Officer to recover unpaid penalties by attachment and other modes and applies Sections 220 to 227, 228A, 229, 232 and the Second and Third Schedules of the Income Tax Act with necessary modifications. The Court treated it as substantive law for the levy of interest, making unpaid penalties recoverable as arrears with statutory interest; Explanation 4 (interest commences from the date the amount became payable) was read as clarifying, not changing, the existing position. (¶¶ 9.4, 9.9, 10, 11.4)
• Sections 15A to 15HB, 15I, 15J, 15JA (Chapter VIA), Securities and Exchange Board of India Act, 1992These provisions prescribe penalties, empower adjudicating officers and list factors for quantum, but none provides for interest on delayed payment; adjudication under them crystallises the liability and the demand follows as a natural sequitur without any separate demand notice being required. (¶¶ 9.1, 9.2, 9.3, 9.9)
• Section 220(1), (2) and (4), Income Tax Act, 1961Section 220(2) imposes simple interest at 1% per month on amounts in a notice of demand not paid within 30 days, and Section 220(4) deems the defaulter in default. As applied through Section 28A, the 'notice of demand' includes the adjudication order fixing a time for payment; failure to pay within the 45 days fixed rendered the appellants defaulters and interest at 12% per annum accrued from expiry of that period. Where an adjudication order fixes no time, the 30-day period of Section 220 would apply. (¶¶ 9.4, 11.2, 11.3, 11.4)
• Section 156, Income Tax Act, 1961Section 156 requires the Assessing Officer to serve a notice of demand when any sum is payable in consequence of an order. It is not incorporated into Section 28A of the SEBI Act, and the limited reference to it in Section 220(1) is only for reckoning the 30-day period; hence no separate demand notice is a precondition to interest under the SEBI Act and the Recovery Officer's later notices merely reiterated the demand. (¶¶ 9.5, 9.6, 9.8, 9.9, 11.2, 11.3)
• Regulations 13(4), 13(4A) and 13(5), SEBI (Prohibition of Insider Trading) Regulations, 1992The penalties under recovery were imposed for violation of these disclosure regulations; the penalty orders had attained finality after affirmation by a three-Judge Bench on 28.02.2019 and their merits were not in issue. (¶¶ 2.2, 6)

Held

• Once Section 28A came into force, any penalty imposed under the SEBI Act and unpaid beyond the stipulated period is recoverable as arrears of income tax, and interest on the unpaid penalty is statutorily leviable under Section 220(2) of the Income Tax Act at 1% per month. Statutory dues not paid in time attract statutory interest irrespective of whether the original order mentioned interest; an enabling provision is all that is required, and it was in force when the 2014 adjudication orders were passed. The plea that interest was being levied retrospectively was misplaced, and J.K. Synthetics was distinguished because interest here runs from adjudication, not from the violation. (¶¶ 9.4, 10)
• Legislation by incorporation brings the referred provisions into the later Act as they stood at incorporation, unaffected by later amendments, whereas legislation by reference carries subsequent amendments too; a provision incorporated into the original Act is also deemed incorporated into the later Act. The limited reference to Section 156 within Section 220(1) is only for reckoning the 30-day period and is neither incorporation nor reference in the strict sense. (¶¶ 9.6, 9.7, 9.8)
• Unlike the Income Tax Act, where levy flows from charging provisions, adjudication under the SEBI Act is triggered by a violation and itself crystallises the liability; neither the Act nor its rules require a separate demand notice before recovery. The adjudicating officer may fix a period for payment, and on default the liability to pay interest is inevitable. Section 28A is substantive law insofar as it levies interest. (¶ 9.9)
• Since Section 156 is not incorporated into Section 28A, the expression 'notice of demand' for SEBI recoveries includes the adjudication order under Chapter VIA. An adjudication order directing payment within 45 days is a clear and enforceable demand; once it attains finality after unsuccessful challenges, the obligation to pay revives from the date of adjudication, the pendency of challenges or interim orders only postpones or reduces the interest liability, and the Recovery Officer's later demand notices merely reiterate the demand without creating a fresh liability. (¶¶ 11.2, 11.3)
• Explanation 4 to Section 28A, inserted in 2019 to provide that interest under Section 220 commences from the date the amount became payable, did not bring about any substantive change but clarified the existing legal position. Where an adjudication order specifies no time for payment, the 30-day period under Section 220 applies and default triggers interest. (¶ 11.4)
• Interest on unpaid penalties is compensatory, not penal: it compensates the public exchequer for the time value of money lost through delay and accrues automatically on default. Interest therefore accrues from the expiry of the 45-day compliance period in the adjudication orders; accepting that it runs only from the later demand notices would encourage defaulters to delay payment indefinitely. (¶ 11.5)

Result

Appeals dismissed; the Securities Appellate Tribunal's order upholding the attachment notices affirmed. Appellants directed to pay the interest calculated by SEBI within 15 days of receipt of the judgment. No costs; connected miscellaneous applications closed.