Supreme Court clarifies FERA penalty law - "mens rea" not required.

Director of Enforcement Versus M.C.T.M. Corporation Pvt. Ltd. And Ors

Director of Enforcement Versus M.C.T.M. Corporation Pvt. Ltd. And Ors - [1997] 88 COMP. CAS. 449 (SC), 1996 AIR 1100, 1996 (1) SCR 215, 1996 (2) SCC 471, ... Issues Involved:

1. Whether the existence of "mens rea" is a necessary ingredient for establishing contravention of section 10 punishable under section 23 of the FERA, 1947.
2. Whether section 10(1) of the FERA, 1947, is an independent provision making its contravention punishable under section 23(1)(a) or whether its contravention can arise only if there is a breach of some directions issued by the Reserve Bank of India under section 10(2).

Issue 1: Existence of "Mens Rea" as a Necessary Ingredient

The High Court opined that section 23 is a "penal provision" and the proceedings under section 23(1)(a) are "quasi-criminal" in nature. Therefore, unless "criminality" is established, the penalty provided under section 23(1)(a) of the Act cannot be imposed. The High Court held the existence of "mens rea" as a necessary ingredient for the commission of an "offence" under section 10 of the Act. In the absence of a finding about the presence of "mens rea," no punishment under section 23(1)(a) of the FERA, 1947, could be imposed.

However, the Supreme Court disagreed, stating that "mens rea" is a state of mind and under criminal law, it is considered the "guilty intention." The proceedings under section 23(1)(a) of the FERA, 1947, are "adjudicatory" in nature and are not "criminal proceedings." The officers of the Enforcement Directorate and other administrative authorities are expressly empowered by the Act to "adjudicate" only. They perform quasi-judicial functions and do not act as "courts" but only as "administrators" and "adjudicators."

The Supreme Court emphasized that it is the breach of a "civil obligation" which attracts "penalty" under section 23(1)(a) of the FERA, 1947. A finding that the delinquent has contravened the provisions of section 10 of the FERA, 1947, would immediately attract the levy of "penalty" under section 23, irrespective of the fact whether the contravention was made by the defaulter with any "guilty intention" or not. Therefore, the obligation on the part of the Directorate of Enforcement is discharged where it is shown that the "blameworthy conduct" of the delinquent had been established by wilful contravention of the provisions of section 10 of the FERA, 1947. The Supreme Court concluded that "mens rea" is not an essential ingredient for holding a delinquent liable to pay a penalty under section 23(1)(a) of the FERA, 1947.

Issue 2: Section 10(1) as an Independent Provision

The Supreme Court examined whether the respondents contravened the provisions of section 10(1)(a) of the FERA, 1947, by failing to repatriate the foreign exchange within a reasonable time. The High Court held that section 10(1) of the FERA, 1947, is not an independent section, and unless some direction given under section 10(2) by the Reserve Bank of India was contravened, no penalty could be imposed for breach of section 10(1)(a).

The Supreme Court clarified that the scheme of clause (1) of section 10 indicates that any person who has a right to receive foreign exchange or its payment in rupees in India shall not do or refrain from doing anything which has the effect of either delaying or making the receipt of that foreign exchange totally cease, except where expressly or by some general direction authorized by the Reserve Bank of India. The default is complete on the failure to get the foreign exchange repatriated within a reasonable time after the right to receive the same accrues.

The Supreme Court held that section 10(2) enacts a distinct and separate contravention flowing from disobedience of an order or directions issued by the Reserve Bank of India to the person who has already committed a contravention under section 10(1). The issuance of directions under sub-section (2) may occur only after a person has contravened the provisions of section 10(1). Thus, sub-section (2) is attracted after the contravention of sub-section (1) is established, meaning that contravention of sub-section (1) is a distinct offence, independent of the breach which may be committed subsequently by disobedience of any order or direction issued under sub-section (2).

The Supreme Court concluded that contravention of sub-section (1) of section 10 would invite penalty under section 23(1)(a), and penalty shall also be leviable for contravention of any of the directions issued by the Reserve Bank of India under sub-section (2) of section 10. The High Court's interpretation that the contravention under sub-section (1) of section 10 is not complete unless there is a violation of the directions issued by the Reserve Bank of India under sub-section (2) was incorrect.

Conclusion

The Supreme Court set aside the judgment of the High Court. The penalty imposed upon each of the directors of the company was waived, but the penalty imposed upon the company on both charges was maintained as modified by the Appellate Board. The appeal succeeded, and the parties were directed to bear their own costs.