CJI Khanna had nudged Justice Varma to resign but he had refused, sources said.
The Union government is weighing the option of bringing in Parliament an impeachment motion against Allahabad High Court judge Yashwant Varma, who has been indicted by a Supreme Court-appointed probe panel after the discovery of a huge sum of burnt cash from his official residence in the national capital.
Sources in the government said an impeachment motion in Parliament, which meets next during the Monsoon Session starting in the second half of July, is an obvious choice if Justice Verma, who was repatriated from Delhi High Court to Allahabad High Court after the unsavoury incident, does not resign on his own.
The then Chief Justice of India Sanjiv Khanna had written to the president and the prime minister, recommending his impeachment. CJI Khanna sent the letter after an in-house inquiry panel constituted by the top court indicted Varma, though its findings were not made public.
CJI Khanna had nudged Justice Varma to resign but he had refused, sources said.
An official source, however, added that a formal process for the action against Mr Varma has not begun yet.
Justice Varma has claimed innocence, denying any link to the cash that was discovered following a fire at his outhouse.
Government sources said they would take opposition parties into confidence before moving against Mr Varma, who has faced criticism from political parties across the spectrum.
"A final decision on the matter will be taken soon. It is difficult to ignore such a visible scandal," a source said.
An impeachment motion could be brought in either of the two Houses of Parliament.
In the Rajya Sabha, at least 50 members have to sign the motion and in the Lok Sabha, 100 members have to support it.
Once the motion is passed with a two-thirds vote in support, the Lok Sabha speaker or the Rajya Sabha chairman writes to the CJI to nominate a sitting Supreme Court judge and a chief justice of a high court for a probe committee.
The government, on its part, nominates an "eminent jurist" to the panel that investigates the charges mentioned in the motion.
The government, the sources said, would like the motion to be supported by all parties and would consult them on the draft of the motion, which will carry the findings of the three-member committee that investigated the discovery of wads of half-burnt cash from the residence of the judge who was then with the Delhi High Court.
He was later repatriated to the Allahabad HC
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