2014 (12) TMI 1355 - HC - FEMA

Court overturns penalties for FERA violations despite RBI approvals

Continental Constructions Ltd. and Ors. Versus Special Director of Enforcement

The High Court overturned penalties imposed on CCL and its directors for FERA violations despite post facto approvals by the RBI for various transactions. ... Effect of granting post facto approval - Permission accorded u/s 29(1)(b) of the Foreign Exchange Regulation Act, 1973 for the purchase of shares u/s 19(1)(a) FERA for the export of the shares issued to the country of the residence of the non-resident investors as well as under Section 29(1)(a) FERA for non-resident participation in CCL exceeding 40% - HELD THAT:- As 'explained by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1985 (12) TMI 289 - SUPREME COURT] , the discretion is with the RBI whether to grant permission or not; whether it is an ex post facto or any other permission. The wisdom of the RBI in granting post facto approval is not to be interfered with. The effect of granting post facto approval is as if the infraction did not occur in the first place and it stands regularized with respect to the date of such infraction. If the orders passed by the RBI dated 9th February 1989 and 11th April 1989 are carefully examined, the post facto approvals virtually cover every aspect of the twelve show cause notices that were issued subsequently to CCL and its directors. In fact the whole idea of a post facto approval was that the failure to obtain prior permission as emphasised in various provisions of the FERA was condoned and therefore regularized. Therefore, this Court fails to understand how despite noticing the above aspect of the aforementioned two letters of the RBI, the SD proceeded to impose penalties as far as SCNs VI-VII are concerned. Only because prior permission was not obtained, this Court has no hesitation in holding that the findings under SCNs VI-VII and the consequent penalties imposed are misconceived and cannot be sustained in law. Turning to SCN No. VIII, the bone of contention appears to be that there is no specific permission for payment of commission to the individual directors whereas the post facto permission was granted for the payment of the salaries. Admittedly, the word 'salaries' is not defined in the FERA. There is no rational explanation as to why the definition of salary under the Income Tax Act, 1961 could not be adopted for the purposes of determining whether the payment of such commission was also regularized by the RBI. In these circumstances, this Court is unable to agree with the conclusion reached by the SD as regards SCN No. VIII and the penalty imposed thereunder also cannot be sustained. As far as SCN No. IX is concerned, the view of the SD was that the act of CCL in granting loans was not with specific approval. This finding overlooks the actual wording of the letter dated 11th April 1989 of the RBI. It begins by noticing 'your granting of loan to NRI shareholders for investing in companies to shares and issue of bonus/rights shares'. Once the allotment of shares had been approved and specific permission had also been given under Section 29(1)(b) FERA to the NRI shareholders for purchasing the shares clearly the entire act of granting loans was itself regularized. Therefore, this Court is unable to sustain the finding of the SD as regards SCN No. IX and the consequent penalties imposed. The crux of the SCN No. IX concerns para (d) of the letter dated 11th April 1989. The condition for grant of the approval was that the dividends accruals had to be deposited to the investor's ordinary non-resident account and since that was not shown to have been the case, there was violation of Section 9(1)(a) FERA. A careful perusal of SCN No. IX would show that no such allegation has been made and that the notice having not been put on notice on whether or not they have deposited dividends in the ordinary non-residents account, it was not justified to find violation on that basis. As pointed out by Mr. Narang, learned counsel for the Appellant that the Appellants on having been put to notice on such violation could have produced material to explain that they had in fact complied with such condition. In that view of the matter the finding on SCN No. X cannot be sustained and the penalties imposed therein are also hereby set aside. The issue as far as SCN Nos. XI to XVII is concerned is about the value of the shares allotted to the directors. The SD proceeded' on the basis that the letter dated 11th April 1989 approved the allotment of 5,50,000 shares of ₹ 10 each, and any value in excess of that would be unauthorized. The above approach is based on the fact that the approval by the RBI granted vide letter dated 11th April 1989 was not only for allotment of shares but also for allotment of consequential bonus/right shares. Once the original allotment of shares is regularized then it goes without saying that any consequential allotment of bonus shares would also stand regularized. In respect of each of the directors explanation is available on record as to how they have been allotted bonus shares. This Court is, therefore, unable to accept the reasoning given in the AO order as regards SCN Nos. XI to XVII and the consequent finding regarding violation of Section 29(1)(b) and 19(1)(d) FERA. As a result the AO order dated 15th October 1990 is hereby set aside. The consequent order dated 30th May 2008 of the Appellate Tribunal is also hereby set aside. The appeals are at-lowed in above terms. Issues:1. Post facto approval by RBI for various transactions.2. Levying penalties by Special Director for violations of FERA.3. Imposition of penalties on CCL and its directors for different transactions.4. Dismissal of appeals by the Appellate Tribunal.5. Legal interpretation of RBI post facto approvals.Analysis:1. The judgment revolves around the post facto approvals granted by the RBI for various transactions carried out by CCL and its directors. The RBI granted post facto approvals for inter-project fund transfers, allotment of shares, payment of commissions, loans to directors, and dividend payments. These post facto approvals were crucial in regularizing the transactions and condoning the failure to obtain prior permissions as required by FERA.2. The Special Director imposed penalties on CCL and its directors for alleged violations of FERA despite the post facto approvals granted by the RBI. The penalties were imposed for different transactions such as the call deposit account, inter-project fund transfers, payment of commissions, loans to directors, and dividend payments. The judgment scrutinizes the legality of these penalties in light of the RBI's post facto approvals.3. The penalties imposed on CCL and its directors for various transactions were challenged in the appeals. The penalties ranged from Rs. 25,000 to Rs. 5 lakhs depending on the nature of the transaction. The judgment critically evaluates each penalty imposed by the Special Director and assesses whether they were justified considering the RBI's post facto approvals and the provisions of FERA.4. The Appellate Tribunal dismissed the appeals filed by CCL and its directors, upholding the penalties imposed by the Special Director. However, the High Court analyzed the legal aspects of the case, including the RBI's post facto approvals, and concluded that the penalties imposed were misconceived in certain instances due to the regularizations provided by the RBI.5. The High Court's interpretation of the RBI's post facto approvals played a significant role in overturning the penalties imposed by the Special Director and upheld by the Appellate Tribunal. The judgment emphasized that post facto approvals by the RBI effectively regularized the transactions, and penalties imposed without considering these approvals were legally unsustainable. The High Court set aside the penalties and allowed the appeals in favor of CCL and its directors.