2014 (8) TMI 607 - HC - FEMA

Court sets aside guilty finding under FERA, director exonerated, penalties revoked, refund ordered.

Umesh K. Modi Versus Deputy Director of Enforcement

The court set aside the orders finding the director guilty of contravening sections of FERA, exonerating him from the charges. The appeal was allowed, ... Contravention of Section 8 (3) read with Section 8 (4) and Section 68 of the Foreign Exchange Regulation Act, 1973 - Penalty upon Director of company - Appellant states that he was a part time, non-executive director of MXL but neither in-charge of nor responsible for the conduct of its day-to-day affairs. MXL commenced its business in the year 1983-84 and had been importing goods/raw materials for its business requirements. MXL was amalgamated with Xerox Modicorp Limited (“XML”) in the year 2000 - Held that:- Appellant gave a separate reply on 9th April 2001 to the SCN dated 19th February 2001 which has not been discussed in the AO. In other words the DD did not advert to specific defence of the Appellant that at the relevant time he was not a director in-charge of or responsible to the company for the conduct of its day-to-day affairs. The AT too does not appear to have noticed the above decisions of the Supreme Court and has mechanically concluded that since there was no restriction on the exercise of powers by the Appellant in relation to the transactions in question, he should be held liable. In light of the reply dated 9th April 2001 sent by the Appellant it was possible to discern the distinction between those directors who were in-charge of the day-to-day affairs of the company and those were not. The explanation offered by the Appellant is that the Company Secretary of XML placed before the Board of Directors of MXL compliance certificates at every meeting held during the relevant period, which led the directors, including the Appellant, to believe that there were no contravention of any of the statutory provisions, appears to be a plausible one. This explanation has not been considered either by the DD or the AT Appellant on his part discharged the burden in terms of Section 68 (2) of the FERA and was entitled to the benefit of doubt. - Court sets aside the impugned order dated 26th March 2008 of the AT and the impugned AO dated 31st March 2004 of the DD insofar as the Appellant is concerned and exonerates the charge of contravention of Section 8 (3) read with Section 8 (4) and Section 68 of the FERA. - Decided in favour of appellant. Issues Involved:1. Contravention of Section 8(3) read with Section 8(4) and Section 68 of the Foreign Exchange Regulation Act, 1973 (FERA).2. Liability of directors under Section 68 of FERA.3. Adequacy of specific averments in the Show Cause Notice (SCN).4. Burden of proof on directors regarding their role in the company's day-to-day affairs.Issue-wise Detailed Analysis:1. Contravention of Section 8(3) read with Section 8(4) and Section 68 of FERA:The Appellant challenged the order by the Appellate Tribunal for Foreign Exchange (AT) which upheld the adjudication order (AO) finding him guilty of contravening these sections and imposing penalties. The core issue was whether the Appellant, as a part-time, non-executive director, was responsible for the contraventions related to the failure of submitting exchange control copies of customs bills of entry for certain import transactions by Modi Xerox Limited (MXL).2. Liability of Directors under Section 68 of FERA:Section 68 of FERA holds that every person in charge of and responsible for the conduct of business at the time of contravention shall be deemed guilty. The Appellant argued that he was neither in charge of nor responsible for the day-to-day affairs of MXL. The court noted that the Appellant had provided a detailed reply asserting his non-involvement in daily operations and that compliance certificates were regularly placed before the Board, indicating no statutory violations.3. Adequacy of Specific Averments in the SCN:The SCN issued by the Enforcement Directorate (ED) included a standard paragraph alleging that the directors were responsible for the company's business conduct. The court highlighted that mere mechanical repetition of statutory language without specific allegations was insufficient. The Supreme Court precedents emphasized the need for specific averments detailing how a director was responsible for the contravention. The court found that the SCN lacked such specific details regarding the Appellant's role.4. Burden of Proof on Directors Regarding Their Role in the Company's Day-to-Day Affairs:The court observed that the Appellant had provided sufficient evidence to show that he was not involved in the day-to-day management of MXL. The Appellant's defense, including his separate reply and the compliance certificates presented at Board meetings, was not adequately considered by the adjudicating authorities. The court concluded that the Appellant had discharged his burden under Section 68(2) of FERA, proving that the contravention occurred without his knowledge and that he had exercised due diligence.Conclusion:The court set aside the impugned order of the AT and the AO, exonerating the Appellant from the charges of contravention of Section 8(3) read with Section 8(4) and Section 68 of FERA. The appeal was allowed, and the penalties imposed on the Appellant were revoked. The court also ordered the refund of any deposited amount by the Appellant within four weeks.