W.P.(C)/5876/2024 of JAGJIV KUMAR ARORA & ANR. Vs PUNJAB NATIONAL BANK & ANR.

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$~5*IN THE HIGH COURT OF DELHI AT NEW DELHI

%Judgment Delivered on: 11.08.2025

+W.P.(C) 5876/2024 & CM APPL. 24268/2024

JAGJIV KUMAR ARORA & ANR......PetitionersThrough:Mr. Sameer Rohatgi and Ms. AsthaGumber, Advs.

versus

PUNJAB NATIONAL BANK & ANR......RespondentsThrough:Mr.HashmatNabi,Adv.for R-1/PNB.

CORAM:

HON'BLE MR. JUSTICE VIKAS MAHAJAN

JUDGMENT

VIKAS MAHAJAN, J (ORAL)

1.Thepresentpetitionhasbeenfiledassailingtheimpugnedletter/decision dated 16.04.2024 of the respondent no.1 bank whereby theaccount of M/s Supreme Alloys Limited and the petitioners, have beenclassified as ‘fraud’.

2.Mr. Sameer Rohatgi, learned counsel for the petitioner submits that –(i) the impugned order is cryptic, inasmuch as, no reasons have beenfurnished in the said order; (ii) along with the show cause notice, nodocuments relevant to the controversy, including the Forensic Audit Report,were furnished to the petitioners; and (iii) the personal hearing has not beenafforded to the petitioner before passing the impugned order.

3.To elaborate on his submissions, Mr. Rohatgi has invited attention ofthe Court to the show cause notice dated 21.11.2023, to contend that the saidshow cause notice does not mention any annexures thereto, which have been

furnished to the petitioner. He further submits that the show cause noticewas responded to by the petitioners vide detailed reply dated 05.12.2023,however, none of the contentions raised by the petitioners in the said replyhavebeenconsideredintheimpugnedorderdated16.04.2024.Furthermore, from the impugned order itself it becomes apparent that nopersonal hearing was afforded to the petitioner, in as much as no referenceto any such personal hearing has been made therein.

4.He, therefore, contends that the impugned order is bad in law, andliable to be quashed and set aside. In support of his contentions Mr. Rohatgihas placed reliance on the following decisions - (i) SBI and Ors. v. RajeshAggarwal and Ors., (2023) 6 SCC 1; (ii) IDBI Bank Ltd vs. Gaurav Goel& Ors., 2025 SCC OnLine Del 935; and (iii) Apple Commodities Limitedvs. Punjab National Bank; 2025 SCC OnLine Del 345.

5.Per contra, Mr. Hashmat Nabi invites attention of the Court to theorder dated 06.05.2024 passed by the Division Bench of this Court in LPA359/2024 in the earlier round of litigation, in which the petitioners hadchallenged the order dated 29.04.2024 passed by this Court in WP(C) No.5876/2024, wherein interim stay was not granted to the petitioners.Referring to the said order, Mr. Nabi submits that there is prima faciefinding recorded that the principles of natural justice have been compliedwith.

6.He contends that the present petition has been rendered infructuous, inas much as the FIR has been registered and the investigation is ongoing. Hesubmits that the administrative and criminal actions are independent of eachother, and irrespective of the outcome in the present petition, the criminalproceedings will have to go on.

7.Having heard Mr. Sameer Rohatgi, learned counsel for the petitioners,as well as, Mr. Hashmat Nabi, learned counsel for the respondent no.1 bank,it needs to be noted that earlier also petitioner’s account was classified asfraud and the same was assailed by the petitioner by filing W.P.(C)9446/2019 inter alia on the ground that personal hearing was not afforded tothe petitioners. The said writ petition was allowed by the Division Bench ofthis Court vide judgment dated 25.04.2023 whereby the order impugnedtherein was set aside with liberty to the respondent bank to proceed ahead inaccordance with law and in light of the judgment of the Hon’ble SupremeCourt in Rajesh Aggarwal (supra).

8.Subsequent thereto, the petitioners issued show cause notice dated21.11.2023 calling upon the petitioners to show cause as to why theiraccounts should not be classified as fraud.A perusal of the show causenotice, however, reveals that along with the show cause notice, nodocuments including the report of investigation mentioned therein, werefurnished to the petitioner.

9.The petitioners filed detailed reply dated 05.12.2023 to the showcause notice, however, while passing the impugned order dated 16.04.2024none of the contentions raised by the petitioner in its detailed reply havebeen considered. The impugned order by which the account of the petitionerhas been classified as fraud is reproduced below in extenso:

“Ref: Our Show Cause Notice (SCN) dated 21.11.2023Re: Your response vide letter no Nil dated 05.12.2023

We have taken cognizance of your response to our Show CauseNotice and after due examination of the same it is concluded thatsufficient reasons have not been provided by you to explain theirregularities observed in the conduct of your account to the

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satisfaction of the Bank.

2. Accordingly, Bank has decided to classify your loan account as‘Fraud’ for the following reasons:‘Fraud’ for the following reasons:

Cheating and Forgery

Loan was availed on the basis of invalid AssignmentAgreement/POA in respect of IpsAgreement/POA in respect of Ips

Funds transferred to allied firms and payment to suchcompanies which are not engaged in the line of business.companies which are not engaged in the line of business.

The Bank shall be taking further course of action to report theaccount/ your name to the Reserve Bank of India (RBI) as per thedirections contained in the RBI Master Directions/ Circulars issuedtime to time, in this regard.”

10.From the perusal of above quoted impugned order, it is not possibledecipher as to what is the nature of cheating and forgery committed, nor itcan be ascertained in what manner the Assignment Agreement/POA were ininvalid. It has also not been elaborated how much funds were transferred,and to which allied firms and companies, who are allegedly not engaged inthe same line of business.Clearly, the reasons given in the impugned orderlack clarity and are cryptic. Thus, the impugned order does not demonstrateadequate reasoning for classifying the account of the petitioner as fraud.

11.At this stage, it is apposite to refer to the decision in AppleCommodities (supra), wherein Coordinate Bench of this Court undersomewhat similar circumstances, had observed as under:

“3. Quite obviously, the bank does not seem to have given any“independent and specific reason” as to why it has taken the abovesaid decision to classify the loan account as ‘fraud’. Of course,findings of the investigation conducted by the bank were made partof the Show Cause Notice and the bank while declaring the accountas ‘fraud’, most probably, would have swayed away by the same,“independent and specific reason” as to why it has taken the abovesaid decision to classify the loan account as ‘fraud’. Of course,findings of the investigation conducted by the bank were made partof the Show Cause Notice and the bank while declaring the accountas ‘fraud’, most probably, would have swayed away by the same,

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fact remains that the order in question does not make it amplyspecific and clear.

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6. Whenever any decision is made by any administrative body orfinancial institution, it is imperative that such decision containsthe reasoning. Such requirement is not mere proceduralformality; it rather stems from the fundamental need to preventarbitrariness and to ensure accountability. Thus, for the sake ofclarity, fairness and transparency, every decision, particularlythose affecting vital rights and interests, must be supported byadequate reasoning that demonstrates the application of soundjudgment, in line with recognized legal standards.

7. This Court is also cognizant of the specific directions containedin State Bank of India v. Rajesh Agarwal, 2023 SCC OnLine SC352 wherein also it has been held that any such order has to be areasoned one.

8. In the present case, the expression used in the impugned orderlacks clarity. It is crucial to emphasize that the order in questionexpressly records that when the show cause notice was issued, thebank had perceived the account/s as fraud. However, at the timeof final consideration, there should have been some discussion,elaboration and substantiation. The lack of which clearlydemonstrates that the order fails to provide adequate reasoningfor the classification of the account of petitioner as fraud.xxxxxxxxxxxxxxxx

10. The impugned order is, accordingly, set aside.”

(emphasis supplied)

12.Further, on pointed query posed by this Court to Mr. Nabi as towhether any documents have been furnished by the bank along with showcause notice, Mr. Nabi has not been able to show any report of investigation,on which the show cause notice is predicated, or any other documents whichare relevant to the controversy, were ever given to the petitioners.

13.Needless to say, furnishing of documents which are relevant to thecontroversy are mandatory. Reference in this regard may be had to the

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decision of the Hon’ble Supreme Court in T. Takano vs. Securities andExchange Board of India and Another, (2022) 8 SCC 162 wherein it washeld that not only the documents which have been relied upon in the showcause notice, but all other material which is relevant for adjudication, needto be supplied to the person against whom the proceedings are contemplated.The relevant paragraphs of the said decision read thus:

“29. The purpose of disclosure of information is not merelyindividualistic, that is to prevent errors in the verdict but is alsotowards fulfilling the larger institutional purpose of fair trial andtransparency. Since the purpose of disclosure of informationtargets both the outcome (reliability) and the process (fair trialand transparency), it would be insufficient if only the materialrelied on is disclosed. Such rule of disclosure, only holds nexusto the outcome and not the process. Therefore, as default rule,all relevant material must be disclosed.

30. It would be fundamentally contrary to the principles of naturaljustice if the relevant part of the investigation report which pertainsto the appellant is not disclosed. The appellant has to be given areasonableopportunityofhearing.Therequirementofareasonable opportunity would postulate that such material whichhas been and has to be taken into account under Regulation 10must be disclosed to the noticee. If the report of the investigatingauthority under Regulation 9 has to be considered by the Boardbefore satisfaction is arrived at on possible violation of theregulations, the principles of natural justice require due disclosureof the report.

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50. The following principles emerge from the above discussion:

50.1. quasi-judicial authority has duty to disclose thematerial that has been relied upon at the stage of adjudication.

50.2. An ipse dixit of the authority that it has not relied oncertain material would not exempt it of its liability to disclosesuch material if it is relevant to and has nexus to the actionthat is taken by the authority. In all reasonable probability,

such material would have influenced the decision reached bythe authority.

50.3. Thus, the actual test is whether the material that isrequiredtobedisclosedisrelevantforpurposeofadjudication. If it is, then the principles of natural justicerequire its due disclosure.”

(emphasis supplied)

14.Likewise, reference can also advantageously be made to the decisionof the Bombay High Court in Milind Patel v. Union Bank of India andOthers, 2024 SCC OnLine Bom 745 wherein referring to the decision in T.Takano (supra) it was observed that fair and transparent symmetrical accessto information would mean providing access to not only incriminatingmaterial but also exculpatory material, since all such information would berelevant for arriving at the truth. Therefore, access to the record is vitalelement of complying with principles of natural justice. Relevant paragraphsfrom the said decision read thus:

“25. plain reading of Takano [T. Takano v. Securities andExchange Board of India, (2022) 232 Comp Cas 136 (SC); (2022) 8SCC 162; (2022) 3 SCC (Cri) 306; (2022) 4 SCC (Civ) 248.] wouldthrow light on how the Master Circular must be construed. TheMasterCircularconsciouslyenablesinflicting“penal"consequences, and underlines the “imperative” need to adhere to a“transparentmechanism”.Theavoidanceofinformationasymmetry and the means of ensuring transparency as outlined bythe hon'ble Supreme Court in Takano [T. Takano v. Securitiesand Exchange Board of India, (2022) 8 SCC 162 wouldnecessarily mean that principles of natural justice, including theneed to provide the underlying material, are inherent and implicitin the process stipulated under the Master Circular. The materialand information in question for disclosure to the noticee would beall “relevant” material and not just information that is “reliedupon” or “referred to” in the show-cause notice.26. Not only must information that is referred to and relied on inthe show-cause notice be supplied but also information that mayundermine the allegations contained in the show-cause notice(which may therefore not be referred to or relied on) must besupplied only to ensure that everything relevant to arrive at thetruth is available to both parties. The objective of the proceedingsinitiated by issuance of show-cause notice is not to somehow findthe noticee guilty of wilful default on the same terms as alleged.Instead, the objective is to arrive at the truth as to whether or notan individual in question is to be subjected to “penal" (in theReserve Bank of India's words) consequences.

Therefore, if the bank has conducted forensic investigation intoalleged diversion and siphoning off of funds, and specific rolesplayed by specific individuals is brought out in the investigation,and such probe would point to plausible interpretation thatcertain individuals did not play any role in the diversion andsiphoning, the material underlying such plausible inference wouldunderminetheallegations.Therefore,fairandtransparentsymmetrical access to information, as stipulated by the hon'bleSupreme Court in Takano would mean providing access to notonly incriminating material but also exculpatory material, sinceall such information would be relevant for arriving at the truth.Therefore, access to the record is vital element of complyingwith principles of natural justice. In the instant case, not only hasno material been supplied, but also Union Bank has actuallyasserted on oath that it was not required to provide any materialwhatsoever, and that it is for the noticee to prove his innocence.”

(emphasis supplied)

14.This Court also find merit in the submission of Mr. Rohatgi that nopersonal hearing has been afforded to the petitioners before passingimpugned order, inasmuch as the impugned order does not refer to anypersonal hearing having been granted to the petitioner.Further, on beingqueried by this Court as to whether any personal hearing was afforded, Mr.Nabi fairly concedes that no such personal hearing was granted to thepetitioner.

15.It is apposite to observe that granting of personal hearing ismandatory before decision is taken to classify the account as fraud.Reference in this regard may be had to the decision of the Hon’ble SupremeCourt in Rajesh Aggarwal (supra) wherein it was observed as under:

“55. Classification of the borrower's account as fraud under theMaster Directions on Frauds virtually leads to credit freeze forthe borrower, who is debarred from raising finance from financialmarkets and capital markets. The bar from raising finances couldbe fatal for the borrower leading to its “civil death” in addition tothe infraction of their rights under Article 19(1)(g) of theConstitution. Since debarring disentitles person or entity fromexercising their rights and/or privileges, it is elementary that theprinciples of natural justice should be made applicable and theperson against whom an action of debarment is sought should begiven an opportunity of being heard.

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67. The Master Directions on Frauds do not expressly exclude aright of hearing to the borrowers before action to class theiraccount as frauds is initiated. The principles of natural justice canbe read into statute or notification where it is silent ongranting an opportunity of hearing to party whose rights andinterests are likely to be affected by the orders that may be passed.

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E. Conclusion

98. The conclusions are summarised below:

98.1. No opportunity of being heard is required before an FIR islodged and registered.

98.2. Classification of an account as fraud not only results inreporting the crime to the investigating agencies, but also has otherpenal and civil consequences against the borrowers.

98.3. Debarring the borrowers from accessing institutional financeunder Clause 8.12.1 of the Master Directions on Frauds results inserious civil consequences for the borrower.

98.4. Such debarment under Clause 8.12.1 of the MasterDirections on Frauds is akin to blacklisting the borrowers forbeing untrustworthy and unworthy of credit by banks. This Court

has consistently held that an opportunity of hearing ought to beprovided before person is blacklisted.

98.5. The application of audi alteram partem cannot be impliedlyexcluded under the Master Directions on Frauds. In view of thetime-frame contemplated under the Master Directions on Fraudsas well as the nature of the procedure adopted, it is reasonablypracticable for the lender banks to provide an opportunity of ahearing to the borrowers before classifying their account as fraud.98.6. The principles of natural justice demand that the borrowersmust be served notice, given an opportunity to explain theconclusions of the forensic audit report, and be allowed torepresent by the banks/JLF before their account is classified asfraud under the Master Directions on Frauds. In addition, thedecision classifying the borrower's account as fraudulent must bemade by reasoned order.

98.7. Since the Master Directions on Frauds do not expresslyprovide an opportunity of hearing to the borrowers beforeclassifying their account as fraud, audi alteram partem has to beread into the provisions of the directions to save them from thevice of arbitrariness.

99. In the result, the judgment of the Division Bench of the HighCourt of Telangana dated 10-12-2020 [Rajesh Agarwal v. RBI,2020 SCC OnLine TS 2021] is upheld. The judgments of the HighCourt of Telangana dated 22-12-2021 [Shree Saraiwwalaa AgrrRefineries Ltd. v. Union of India, 2021 SCC OnLine TS 1816] and31-12-2021 [Yashdeep Sharma v. RBI, 2021 SCC OnLine TS 1852],and of the High Court of Gujarat dated 23-12-2021 [Mona JigneshAcharya v. Bank of India, 2021 SCC OnLine Guj 2811] areaccordingly set aside. The civil appeals are disposed of. WritPetition (C) No. 138 of 2022 is also disposed of in the above terms.There shall be no order as to costs.

100. Pending application(s), if any, shall stand disposed of.”

(emphasis supplied)

16.The Hon’ble Division Bench of this Court in Gaurav Goel (supra) hasalso clarified that the expression hearing used in Rajesh Aggarwal (supra)means personal hearing, the relevant paragraphs from Gaurav Goel (supra)

read thus:

“19. Since, in paragraph 99, the Hon’ble Supreme Court hasupheld the said decision of the Hon’ble High Court of Telangana(2020 SCC OnLine TS 2021), in our considered opinion, readingthe conclusion in Rajesh Agarwal, (supra), as can be found inparagraph 98.4, to mean that in proceedings under the RBIDirections, opportunity of hearing would not include opportunityof personal hearing, is untenable. Once, the Hon’ble SupremeCourt upheld the judgment of the Hon’ble High Court ofTelanganawhichclearlyhaddirectedforprovidinganopportunity of personal hearing as well, to conclude thatopportunity of hearing would not include opportunity of personalhearing, in our opinion, will be erroneous.

20. The submission made by learned counsel representing theappellant that the proceedings consequent upon the show causenotice under the RBI Directions are administrative proceedings assuch the process of fair hearing will not be at the standard of ajudicial proceeding, in our considered opinion, does not have anybearing to the instant case for the reason that the Hon’ble SupremeCourt in Rajesh Agarwal, (supra) has clearly reiterated the well-known principle of law that even in administrative action, theprinciples of audi alteram partem are to be observed. The extent of

application of the principle of audi alteram partem in theproceedings drawn under the RBI Directions has already beenexplained by the Hon’ble Supreme Court in Rajesh Agarwal,(supra) which has upheld the directions issued by the Hon’bleHigh Court of Telangana where one of the directions issued wasfor providing opportunity of personal hearing as well.

21. It is trite in law that there is no straight jacketed formula toensure observance of principles of justice for the reason that theextent and width of application of this principle depends on thenature of proceedings and the provisions under which suchproceedings are drawn as also on the consequences which suchproceedings entail.

22.However,once the Hon’ble Supreme Court in RajeshAgarwal, (supra) has clearly upheld the directions issued by theHon’ble High Court of Telangana (2020 SCC OnLine TS 2021)regarding providing opportunity of personal hearing in the

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proceedings drawn under the RBI Directions, it is not open to thisCourt to read the application of principle of audi alteram partemin any other manner.”

(emphasis supplied)

17.On an overall conspectus of facts, and the position of law advertedhereinabove, this Court is of the considered view that the impugned orderdated 16.04.2024 cannot be sustained.

18.Accordingly, the petition is allowed and the impugned order dated16.04.2024, whereby the petitioners have been classified as fraud, is setaside and the parties are relegated to the stage of show cause notice. Therespondent no.1/bank is at liberty to pass fresh order keeping in view theobservations made hereinabove.

19.The petition, alongwith pending application, is disposed of in theabove terms.

VIKAS MAHAJAN, J

AUGUST 11, 2025/dss