Commercial advance, not loan or deposit, defeats foreign exchange penalty and vicarious liability against directors.

A transfer made to meet another company's working expenses was treated as a commercial advance, not a loan or deposit, because the accounts, explanatory note and correspondence showed it was given to carry on business in trust and on behalf of that company and lacked an absolute promise to repay. On that basis, no contravention under Section 26(7) of the Foreign Exchange Regulation Act, 1973 was established. Penalties on the company and its directors also could not stand: with the foundational breach unproved, and without specific facts showing the directors were in charge of and responsible for the business, vicarious liability was not made out. The penalty order was set aside.

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Issues: (i) Whether the amount transferred by one company to another for meeting the working expenses of a vanaspati manufacturing arrangement was a loan or deposit attracting Section 26(7) of the Foreign Exchange Regulation Act, 1973. (ii) Whether penalty could be sustained against the company and its directors, including under Section 68 of the Foreign Exchange Regulation Act, 1973.

Issue (i): Whether the amount transferred by one company to another for meeting the working expenses of a vanaspati manufacturing arrangement was a loan or deposit attracting Section 26(7) of the Foreign Exchange Regulation Act, 1973.

Analysis: The transaction was supported by the accounts, explanatory note and contemporaneous correspondence showing that the money was advanced only to meet operating expenses for carrying on the business in trust and on behalf of the other company. The essential feature of a loan, namely an absolute promise to repay, was absent. The mere description in the accounts as "loans and advances" was not conclusive, and the burden of proving lending or borrowing attracting the statutory prohibition remained on the authority.

Conclusion: The amount was not a loan or deposit within Section 26(7) of the Foreign Exchange Regulation Act, 1973, and no contravention on that basis was established.

Issue (ii): Whether penalty could be sustained against the company and its directors, including under Section 68 of the Foreign Exchange Regulation Act, 1973.

Analysis: As the foundational contravention was not proved, the penalty against the company could not stand. Independently, the material did not contain specific factual averments showing that the directors were in charge of and responsible for the conduct of the business so as to attract vicarious liability. The circumstances also did not justify imposition of penalty, particularly where the conduct was consistent with a bona fide commercial arrangement.

Conclusion: The penalties against the company and the directors were unsustainable.

Final Conclusion: The appeals succeeded and the impugned penalty order was set aside in entirety.

Ratio Decidendi: A transaction is not a loan or deposit under Section 26(7) of the Foreign Exchange Regulation Act, 1973 unless there is material showing lending or borrowing with an obligation to repay, and directors cannot be penalised vicariously in the absence of specific facts establishing responsibility for the contravention.

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