Ajay Prakash Lohia Vs Assistant Director (Appellate Tribunal Under SAFEMA Delhi)
SAFEMA Tribunal Sets Aside FEMA Penalty on Former Director; Holds Vicarious Liability Cannot Be Imposed Without Specific Role
The Appellate Tribunal under SAFEMA allowed the appeal filed by Ajay Prakash Lohia, setting aside the ₹6 lakh penalty imposed on him under Section 42(1) of the FEMA in relation to the failure of Uniworth International Ltd. to realise export proceeds. The case arose from the company’s failure to repatriate export proceeds running into substantial foreign currency amounts against several GR-1 Forms. The appellant contended that he had resigned as a director on 29 March 2001, that most exports were made after his resignation, and that he was never responsible for the day-to-day affairs of the company.
The Tribunal found merit in the appellant’s submissions. It noted that 16 out of the 26 GR-1 Forms related to exports made after the appellant had resigned, while in another case the statutory period for realisation of export proceeds had not even expired during his tenure. Consequently, at best, the appellant could have been linked to only a limited number of transactions. More importantly, the Tribunal observed that the Directorate had failed to identify the specific role of the appellant or establish that he was in charge of and responsible for the conduct of the company’s business when the alleged contraventions occurred.
Relying on judicial precedents including Girdharilal Gupta v. D.N. Mehta, Umesh Modi v. Deputy Director, Raman Narula v. Director, and Sayed Wahid v. Director of Enforcement, the Tribunal reiterated that vicarious liability under Section 42 of FEMA cannot be fastened merely because a person was a director. The Enforcement Directorate must specifically plead and prove that the director was responsible for the company’s day-to-day affairs and that the contravention occurred with his consent, connivance or neglect. Since even the Adjudicating Authority had recorded that the complaint did not specify the role of individual directors, the Tribunal held that the essential requirements for invoking Section 42 had not been satisfied. Accordingly, it set aside the penalty and allowed the appeal.
Cases Discussed
- Umesh Modi vs. Deputy Director (Delhi HC), (2015) 130 SCL 621 (Del)
- Raman Narula vs. Director (Delhi HC), (2014) 216 SCL 120 (Del)
- Girdharilal Gupta vs. DN Mehta (SC), AIR 1971 SC 28
- Sayed Wahid vs. Director of Enforcement, (1988) 37 Taxmann 16 (FERAB)
FULL TEXT OF THE JUDGMENT APPELLATE TRIBUNAL UNDER SAFEMA AT NEW DELHI
The present appeal has been filed against Order no. JD(SDC)/02/2018-19 passed by the Ld. Adjudicating Authority on 27.03.2019, a copy of which was sent to the appellant vide the Directorate’s letter dated 13.02.2020, whereby a penalty of Rs. 6 lakh was imposed on the appellant under section 42(1) of the Foreign Exchange Management Act, 1999 (FEMA).
Facts in brief
2. The brief facts of the case are that a complaint was filed before the Adjudicating Authority under Section 16(3) of the FEMA to the effect that M/s. Uniworth International Ltd., 70A, Shakespeare Sarani, Kolkata had huge amount of export proceeds outstanding from overseas buyers. A reference was made to the Reserve Bank of India, Kolkata and in reply, the RBI, vide letter dated 28/08/2001, intimated that the performance of M/s. Uniworth International Ltd., is highly unsatisfactory. RBI also forwarded details of Guaranteed Remittance (GR-1) forms against which export proceeds were pending realization by M/s Uniworth International Ltd. It was also informed by the RBI that the documents were negotiated by the exporter (M/s. Uniworth International Ltd.) through Canara Bank, Punjab National Bank, Punjab & Sind Bank, Centurian Bank, Indusind Bank and HSBC Bank. RBI also informed that exporter’s sister concerns M/s. Uniworth Ltd. and M/s. Uniworth Textiles Ltd. have also huge outstanding of export proceeds over Rs.260 Crores (approx.). However, in the present case, we are only concerned with the export proceeds pending realization by M/s. Uniworth International Limited.
3. The business premises of the company situated at 70A, Shakespeare Sarani, Kolkata-700017 was searched on 14/09/2001 which resulted in the seizure of certain documents.
4. In his statement dated 14/09/2001, Shri Sunil Kumar Mall, inter-alia, stated that he was the General Manager of M/s. Uniworth International Ltd. and that the export related activities were looked after by Shri Surendra Khandelwal.
5. In his statement dated 20/09/2001, Shri Surendra Khandelwal, inter-alia, stated that he was the General Manager of M/s. Uniworth Ltd. looked after the banking and financial institution related work of the company; that he was also attending to similar work of other two companies i.e. M/s. Uniworth International Ltd. and M/s. Uniworth Textiles Ltd. Vide his letters dated 01/12/2001 and 08/01/2002, Shri S.K. Khandelwal forwarded various documents including the details of export proceeds pending realization by M/s. Uniworth International Ltd.
6. During the course of enquiries, the Directorate received, (i) a letter dated 28/02/2002 from M/s. Uniworth International Ltd. forwarding details of export proceeds pending realization by them; (ii) a letter dated 22/02/2002 from M/s. Uniworth Ltd. furnishing the details of export proceeds pending realization by M/s. Uniworth Ltd., M/s. Uniworth International Ltd., and M/s. Uniworth Textile Ltd.: (iii) a further letter M/s. Uniworth Ltd. dated 26/02/2002, forwarding copies of relevant GR-1 forms, invoices and other related documents; (iv) a letter dated 08/10/2010 from M/s. Uniworth International Ltd. furnishing various details of export proceeds pending realization.
7. The Reserve Bank of India (RBI), vide Order dated 19/10/2005 placed M/s. Uniworth International Ltd. on exporter’s Caution List.
8. In order to obtain details of export proceeds outstanding of M/s. Uniworth International Ltd., the bankers of the exporter were asked to furnish the details. In response the bankers informed as under:
- The Punjab & Sind Bank, Kolkata, vide their letter dated 03/02/2005, inter-alia, confirmed that the party has failed to realize export proceeds against 20 GR-1 forms of which 6 GR-1 forms related to exports after 01/06/2000, i.e., after the commencement of FEMA, against which, export proceeds amounting to a total of French Franc (FF) 466209.00, Euro 276917.04 and GBP 27010.00 were pending realization;
- The HSBC Bank, Kolkata vide letter dated 05/05/2010, furnished details of 16 GR-1 forms against which export proceeds were pending realization. 3 GR-1 forms out of 16 GR-1 forms related to exports after 01/06/2000 against which export proceeds totaling to US$ 198120.97 and Euro 84909.84 were pending realization;
- The Indusind Bank vide letter dated 23/08/2010 furnished details of 32 GR-1 forms against which export proceeds were pending realization. 9 GR-1 forms out of 32 GR-1 forms relate toexports 01/06/2000 against which export proceeds totalling to GBP 9514.73 and Euro 764415.68 was pending realization;
- The Centurion Bank furnished details of 11 GR-1 forms against which export proceeds were pending realization. 8 GR-1 forms out of 11 GR-1 forms relate to exports after 01/06/2000 against which export proceeds totalling to Euro 755548.75 and GBP 62998.22 was pending realization.
9. The bankers vide their aforesaid letters confirmed that there was nothing on record to indicate that M/s. Uniworth International Ltd. had taken effective steps to realize export proceeds totalling to Euro 1881791.31, F.F. 466209.00, Pound 99522.95 and US$ 198120.97 and repatriate to India full export proceeds from their overseas buyers.
10. Shri Ajey Prakash Lohia, Shri M.L. Pamecha, Shri N. Sitaraman, Shri Tolaram Jalan, Shri Krishnamurti Srinivasan, Shri Kishore Jhunjhunwala, Shri Santosh Kr. Jain, Shri M.K. Darbari, Shri Anand Gopal Bhatnagar, Shri Srikrishna Jhunjhunwala, Shri Shiv Sharma, Shri Subid Ch. Mazumdar, Shri Sunil Kr. Jain, Shri Sanjeev Saxsena, Shri Sudarshan Lal Baluja, Shri Bagwati Lal Jain, Shri Shyam Sunder Kanoria, Shri Pradeep Kr. Khaitan, Mr. Wayane F Small and Mr. K. Darbari, Directors of M/s. Uniworth International Ltd. were in-charge and were responsible to the company for the conduct of its business and they filed to take steps to realize the export proceeds.
11. Since there appeared to be a case of contravention by the noticees of the provisions of Section 7 & 8 of FEMA, 1999 read with Regulations 8, 9 and 13 of the Foreign Exchange Management (export of goods and services) Regulations, 2000 of Reserve Bank of India Notification No. GSR 409(E) dated 3rd May, 2000 to the extent of Euro 1881791.31. F.F. 466209.00, Pound 99522.95 and US$ 198120.97, a Show Cause Notice bearing No. T-4/8/KOL/2011(SCN-II) was issued on 20/12/2011 by the Special Director to the above-named Noticees.
12. The appellant was found guilty of charges under section 42(1) and a penalty of Rs. 6,00,000/- was imposed upon the appellant.
Aggrieved by the said order, the appellant has filed the present appeal challenging the order on various factual and legal grounds.
Arguments on behalf of the appellant
13. It is submitted on behalf of the appellant that on similar allegations the Adjudicating Officer (the Special Director of ED) acquitted the appellant while adjudicating the other show cause notices issued to M/S Uniworth Ltd, M/S Uniworth Textile Ltd and its Directors including the appellant.
14. It is also submitted that the present matter concerns the exports made by M/S Uniworth International Ltd under the cover of 25 GR-1 Forms. The said exports as per complaint dated 31.1.2011. (Annexure A2 of Appeal) took place between the period 8.6.2000 to 28.7.2001.
15. It is argued on behalf of the Appellant that he had resigned from the company on 29.3.2001. (Annexure A8 of the Appeal). Out of the aforesaid 25 GR-1 forms the exports in respect of 16 GR-1 Forms took place after the date of resignation of the appellant from the company. In the remaining 9 GR-1 Forms, the date of export is shown between the period June 2000 and September 2000. Till the time appellant was a director none of the exports in the 9 GR-1 forms crossed a period of one year from the date of export. Even otherwise appellant was never responsible for day-to-day affairs of the company.
16. It is also argued that the impugned order has been passed without providing copies of the GR1 forms, mentioned in the Complaint.
17. It is further argued that the impugned order has been passed after taking into consideration letters dated 30.05.2018 of the respondent addressed to IndusInd Bank and reply of the bank dated 28.09.2018. Letter dated 30.05.2018 addressed to Punjab and Sind Bank and reply of the bank dated 14.09.2019. Letter dated 30.05.2018 addressed to Centurian /HDFC bank and their reply dated 03.10.2018 and letter dated 30.05.2018 addressed to HSFC Bank and their reply dated 03.10.2018. All the said communications have been made after issuance of the SCN on 02.12.2011. None of these documents were supplied to the appellant and the adjudicating officer took into consideration the said documents while passing the impugned order thereby preventing the appellant to defend the matter.
18. It is also argued that the impugned order has been passed without taking into consideration that the Reserve Bank of India vide its letter dated 11.06.2002 (Annexure A4 of Appeal) has agreed in principle to set off import payables against the export receivables.
19. It is also argued that the Ld. AA ought to have awaited the decision of the Hon’ble High Court of Calcutta in C.S No. 234/2017 filed by the company wherein respondent was one of the parties.
20. It is also argued that the RBI had granted extension of time to the company for realization of export proceeds till 30.6.2004. bank for extension of the time period before the RBI and RBI granted the time till 30.06.2004. The RBI finally allowed the set off import payable against the export receivable. The appellant had resigned from the company on 29.03.2001 and extensions were granted at least up to 30.06.2004, as such appellant cannot be held responsible under any circumstances.
21. Based on the above submissions, it is argued on behalf of the appellant that the present appeal be allowed.
Arguments on behalf of the respondent
22. The counsel on behalf of the respondent has strongly contested the arguments advanced on behalf of the appellant.
23. It is argued on behalf of the respondent that the impugned order has been passed after issuance of Show Cause Notice, grant of sufficient opportunities of hearing and after due consideration of the material available on record. It is submitted that there has been no violation of principles of natural justice.
24. It is further argued that the appellant, being a director during the relevant period, was responsible for ensuring compliance with FEMA provisions. The liability under Section 42 of FEMA attaches to persons who were in charge of and responsible for the conduct of business at the time of contravention. Subsequent resignation does not absolve the appellant from liability for defaults committed during the relevant period.
25. It is also submitted that the pleas regarding ill health, absence from India and lack of involvement in day-to-day affairs are unsupported by evidence and do not absolve the appellant from statutory obligations. The appellant has failed to establish that the contravention occurred without his knowledge or despite exercise of due diligence.
26. It is further argued that the penalty imposed by the Adjudicating Authority is proportionate to the nature of violations and has been imposed within the statutory limits.
27. It is argued on behalf of the respondent that the allegation that the proceedings were conducted in violation of principles of natural justice is incorrect. A detailed Show Cause Notice was served upon the appellant and sufficient opportunities of personal hearing were granted. The reply and submissions filed by the appellant were duly considered by the Ld. AA. However, mere rejection of the explanation furnished by the appellant cannot be treated as non-consideration.
28. It is also argued that once reasonable opportunity has been granted, the authority is justified in proceeding further in accordance with law, including passing an ex-parte order where the party fails to effectively participate.
29. It is submitted on behalf of the respondent that the contention that the appellant cannot be held liable due to resignation dated 29.03.2001 is untenable. The contraventions relate to non-realisation of export proceeds and non-submission of GR-I forms during the period when the appellant was admittedly a director. Subsequent resignation cannot wipe out liability arising from acts or omissions committed during the period of directorship.
30. It is also submitted that the plea that the appellant was not involved in day-to-day affairs is merely an assertion unsupported by evidence. The appellant has failed to discharge the burden of establishing that the contravention occurred without his knowledge or despite due diligence.
31. It is argued on behalf of the respondent that the allegations regarding non-supply of GR-1 forms, bank communications or other relied-upon documents are incorrect and not supported by the record.
32. It is further submitted that during investigation, information was obtained from authorised dealer banks and other concerned authorities, and the replies received formed part of the record relied upon by the Ld. AA.
33. It is also argued that the FEMA Adjudication Rules do not require personal examination of bank officials where official documentary evidence is available. The appellant was given sufficient opportunity to rebut such material but failed to produce any contrary evidence.
34. It is therefore, submitted that no procedural irregularity or prejudice has been established by the appellant.
35. It is submitted on behalf of the respondent that the allegation that the impugned order was passed mechanically or on the basis of conjectures is misconceived. The order of Ld. AA is a reasoned order based on documentary evidence, including bank confirmations, RBI communications and material collected during investigation. The findings recorded by the Adjudicating Authority are supported by relevant evidence.
36. It is argued that reliance upon the RBI communication dated 11.06.2002 is misplaced as the said communication granted only an in-principal approval subject to fulfilment of conditions. The appellant has failed to establish compliance with the conditions or obtaining final approval. Therefore, the said communication does not absolve the appellant from FEMA contraventions.
37. It is submitted on behalf of the respondent that the contention that non-realisation occurred due to lack of reasonable efforts is incorrect.
38. It is further argued that FEMA casts a statutory obligation to realise export proceeds within the prescribed period. No material has been produced by the appellant showing effective steps such as recovery proceedings, arbitration, legal action against buyers or RBI approval for write-off. It is therefore submitted that mere explanation without supporting evidence cannot defeat statutory liability.
39. It is argued that the contention regarding non-payment of imports is irrelevant for determining the contravention relating to non-realisation of export proceeds.
40. It is further submitted that export realisation and import payment obligations are separate statutory requirements and failure in one area cannot justify breach in another.
41. It is submitted on behalf of the respondent that pendency of civil proceedings before the Hon’ble Calcutta High Court does not affect the jurisdiction of the FEMA authorities. FEMA proceedings are independent statutory proceedings and cannot be stalled in absence of any specific stay order.
42. It is argued that the allegation that the impugned order is unreasonable or perverse is without merit.
43. It is further submitted that the findings are based on documentary evidence and the penalty has been imposed within the statutory framework after considering the facts and circumstances of the case.
44. Based on the above submissions, it is argued on behalf of the respondent that the present appeal be dismissed.
Analysis, Findings & Order
45. I have considered carefully the rival submissions on behalf of the parties and perused the material on record. It is the case of the appellant that he had resigned as a director of the company on 29.03.2001. This fact has not been disputed by the respondent directorate. Upon perusal of the Show Cause Notice issued in this case, it is seen that the same is in respect exports made as per 26 GR-1 Forms. Out of the same, it has been pointed out, and is also borne out from the table comprising a part of the Show Cause Notice, that 16 GR-1 Forms relate to the period after the resignation of the appellant, Sh. Ajay Prakash Lohia on 29.03.2001 as a director of the company. As such, he could not be held responsible for non-realization of proceeds in the said cases. Out of the remaining 10 GR forms, in one case, the prescribed period of six months from the date of export for realization of the export proceeds was not yet over. Needless to say, once the statute prescribes a period for certain action, the completion of that action even on the very last day of the limitation period would not entail any adverse consequences. Therefore, the appellant could not have been visited with penal consequences for non-completion of an action for which the prescribed period was not yet over. Thus, at best, the appellant could have been held to be responsible for the non-realisation of export proceeds in respect of exports as per 5 GR-1 Forms.
46. Coming to the vicarious liability of the director in respect of contraventions by the company as laid down under Section 42 of the FEMA the legal principles governing such liability can be gleaned from various authoritative judicial pronouncements. In Girdharilal Gupta vs. DN Mehta, AIR 1971 SC 28, it was held that the provisions dealing with vicarious liability must be construed strictly. To charge a person with vicarious liability, it is necessary for the department to establish, (i) that at the time the contravention was committed by the company, the person was in-charge and was responsible to the company for the conduct of the business of the company, and (ii) that the contravention took place with the consent or connivance of the person, or was attributable to the neglect on the part of the person. It was further held in the said case that a person in-charge must mean the person is in control of the day to day business of the company. In Umesh Modi vs. Deputy Director (2015) 130 SCL 621 (Del), a distinction was drawn between the directors in-charge of day-to-day affairs of the company’s business and other directors who are not. In Raman Narula vs. Director (2014) 216 SCL 120 (Del) it was held that where no factual basis was laid by the Directorate for alleging that the noticee was in-charge of and responsible to the company for conduct of its business, he could not be held vicariously liable for the alleged contravention by the company. In Sayed Wahid vs. Director of Enforcement (1988) 37 Taxmann 16 (FERAB), it was held that unless the department discharges the burden of inter alia proving that the person vicariously charged with the contravention was in charge and was responsible to the company for the conduct of its business, the action under Section 42 (1) would be void ab initio.
47. As against the above legal position, in the present case it is an admitted fact, clearly mentioned in the impugned order, that in the complaint filed before the Ld. Adjudicating Authority, the roles of the respective directors were not mentioned. The relevant paragraphs of the impugned order which occurs under the broad heading “FINDINGS” is as follows:
“Role of Individual noticees other then the company (Noticee No. I)
I find that the Show Cause Notice No. T-4/08/KOL/2011 (SCC-II) dated 20/12/2011 was issued to M/s. Uniworth International Ltd. and to 20 individuals being the Directors of the company for their failure to take reasonable steps to realize the exports proceeds based on the Complaint filed u/s. 16(1) of FEMA, 1999. However, in the Complaint specific role of the respective Directors has not been mentioned. I find that the exports were made under the cover of 6 GRI forms negotiated through the Punjab & Sind Bank, Kolkata, 3 GRI forms negotiated through HSBC, Kolkata, 9 GRI forms negotiated through IndusInd Bank and 8 GRI forms negotiated through Centurian Bank/HDFC Bank. However, in the complaint while framing charges against the 20 number of individuals as Directors of the company, the Complainant (Investigating Officer) did not specify role of each of the Directors or non-realisation of the exports proceeds. None of the relied upon documents show role of the other individuals notice/directors or that they were responsible for the unrealized exports proceeds. [Emphasis supplied]
48. From the above extract from the impugned order, it is amply evident that the Directorate in the present case failed to discharge its primary burden of specifying the role of the appellant herein, and whether he was indeed responsible to the company for the conduct of its business, and thus, accountable for the contravention by the company.
49. It light of the above findings, I do not find that the present case was a fit one for imposition of penalty upon the appellant herein. Consequently, the impugned order is set aside qua the appellant herein. As such, the penalty imposed upon the appellant would stand cancelled.
50. The above order, the present appeal shall stand allowed.
51. Pending applications, if any, shall also stand disposed of.
52. No order as to costs.
