2019 (9) TMI 161 - AT - FEMA

Tribunal rules transaction not a loan, penalties overturned, directors not liable.

M/s Hindustan Lever Ltd. & Ors., Shri V. Vaghul, Shri A.S. Ganguly, Shri A.L. Mudliar, Shri C.J. Mahimkar Versus The Special Director Directorate of Enforcement, Mumbai

The tribunal concluded that the transaction between the parties was deemed an advance for operational expenses, not a loan. As both entities were ... Guilty of contravention of the provisions of Section 26(7)(i)(ii) of FERA 1973 - Penalty imposed on directors - dealing between a FERA Company and ‘a Person resident in India’ (which could only be an individual) - arrangement between two bodies corporate - whether amount given by LIL to HLL can neither be treated as a ‘loan’ or ‘deposit’? - HELD THAT:- Scope of “person resident in India”, it cannot be held that the amount given by LIL to HLL in the aforesaid circumstances was not ‘bonafide’ and that the Company did not act under an ‘honest and genuine belief’ that it was permissible to do so. Nor can it be said that the company ‘acted deliberately in defiance of law’ or were ‘guilty of conduct contumacious or dishonest’ or ‘acted in conscious disregard of its obligation’. Assuming without admitting that there is a technical or venial breach, there is no justification for imposition of Penalty. Apart from the bonafide belief of the Appellant that in the facts and circumstances of the case and on proper appreciation of the aforesaid entry read with the explanatory note and the letter dated 13.2.1987 sent by LIL to the Dy. Director, ED, as well as the interpretation of Section 2(p) of FERA dealing with ‘person resident in India’, the Appellant also sought opinion from Shri M. Hidayatullah (Hon'ble Chief Justice of India- Retd.) annexed to the Additional Affidavit dated 29.3.2010 as Annexure D. At pg. 81 onwards, it is opined that in the facts and circumstances of the case referred to therein, the amount given by LIL to HLL can neither be treated as a ‘loan’ or ‘deposit’. As such, Section 26(7) cannot be invoked and where it is opined that since the arrangement in the present case is between two bodies corporate and the two clauses of sub-section (7) of Section 26 contemplates dealing between a FERA Company and ‘a Person resident in India’ (which could only be an individual), the said sub-section would not apply. The impugned order is also not sustainable with regard to the penalty imposed on directors as it is settled law that in order to invoke Section 68 to proceed vicariously against the Directors of the Company for an offence committed by the Company, it is not enough to merely allege & set out the contents of Section 68 in the Show Cause Notice /Memorandum. It is necessary to make specific factual averments against the particular director as to how he is alleged to be incharge of and responsible to the Company for the conduct of business of the Company. In the absence of any such factual averments, no action can be taken with reference to Section 68 against any Director. In the present case, apart from merely repeating the language of Section 68, no factual averment is made against any director as to how he is incharge of and was responsible to the Company for the conduct of its export business and was responsible for the recovery of the export proceeds in question. In the absence of any such factual averments, the Show Cause Notice /Memorandum is bad and the proceedings stand vitiated. One of the Directors Mr. N. Vaghul joined the Board of Directors of the Appellant Company only in 1987 and prior thereto he was working with ICICI. Since the entry relating to the amount given by LIL to HLL, on the basis of which proceedings were initiated in the present case relates to the year 1985-86 before he joined the Appellant Company, in any event he cannot be held vicariously liable under Section 68 in respect of the alleged contravention by the Appellant Company. Dr. A.S Ganguly, who was the Chairman of the Board of Directors was in any event not concerned with the day-to-day functioning of the Appellant Company and was not concerned with the transaction in question and as such he could not be held vicariously responsible under Section 68. All other Directors were ‘Non-executive Directors’ and not ‘Whole-time Directors’ and as such were not responsible or concerned with the day-to-day functioning of the Appellant Company and as such Section 68 could, in any event, not be invoked in respect of such Non-executive Directors. The penalty imposed against all the Directors is liable to be set aside. The view of an eminent Jurist also establishes the bonafide of the Appellant. Keeping in view the principles laid down in the aforesaid decision of Hindustan Steels, there could be no case for imposition of penalty. Issues Involved:1. Whether the appellants contravened Section 26(7)(i) and 26(7)(ii) of FERA 1973.2. Whether the transaction in question was a 'loan' or 'advance.'3. Applicability of Section 26(7) of FERA to the transaction between two corporate entities.4. Liability of the directors under Section 68 of FERA.Detailed Analysis:1. Contravention of Section 26(7)(i) and 26(7)(ii) of FERA 1973:The appellants were penalized for allegedly violating Section 26(7)(i) and 26(7)(ii) of FERA 1973, which prohibit lending or depositing money with a firm or company having more than 40% non-resident interest without RBI's permission. The respondent argued that M/s. Hindustan Lever Ltd. (HLL) received advances from Lipton India Ltd. (LIL) without RBI's approval, constituting a violation.2. Nature of the Transaction - Loan or Advance:The appellants contended that the amount of Rs. 1038.44 lakhs transferred from LIL to HLL was an advance for meeting the operational expenses of manufacturing Vanaspati on behalf of LIL. They argued that the transaction was not a loan, as there was no absolute promise to repay the amount. The entry in the annual accounts and balance sheet of LIL described the amount under 'Loans and Advances,' with an explanatory note clarifying it as an advance for operational expenses.3. Applicability of Section 26(7) of FERA:The tribunal examined whether Section 26(7) of FERA applies to transactions between two corporate entities. The definition of 'person resident in India' under Section 2(p) of FERA was scrutinized. It was concluded that this definition pertains to individuals and not corporate entities. Therefore, the transaction between LIL and HLL, both corporate entities, does not fall under the purview of Section 26(7).4. Liability of Directors under Section 68 of FERA:The tribunal also addressed the penalties imposed on the directors of HLL. It was noted that specific factual averments regarding the directors' involvement and responsibility in the transaction were absent. The tribunal referenced several Supreme Court decisions, emphasizing that vicarious liability of directors cannot be presumed without specific allegations and evidence. Consequently, the penalties imposed on the directors were deemed unsustainable.Conclusion:The tribunal concluded that the transaction between LIL and HLL was an advance for operational expenses and not a loan. Since both entities are corporate bodies, Section 26(7) of FERA does not apply. Additionally, the penalties imposed on the directors were set aside due to the lack of specific allegations and evidence of their involvement. The appeals were allowed, and the penalties imposed by the Special Director were set aside. The appellants were entitled to receive the pre-deposit amount from the respondent within two months.